December 2018 - Anders CPA

December 27, 2018

State Tax Implications for Major League Baseball Players

MLB Superstar free agents Bryce Harper and Manny Machado are set to sign record-breaking contracts this offseason. While many things factor into where a player signs, state tax rates can play a large role in such a big decision. State income tax rates range from 0% to 13.3%. Over the life of a $300 million contract, the team that Bryce Harper or Manny Machado chooses could result in roughly $40 million in state tax burden.

State Taxes for MLB Players

Throughout a player’s tenure on a team, the state they play in can have major implications on the net dollar amount received over the life of the contract. This is especially relevant in Major League Baseball because each team has 81 homes games each season. Former St. Louis Cardinal, Lance Lynn, just signed a three-year, $30 million contract with the Texas Rangers. Since the state of Texas has no income tax, the contract Lynn signed provides a greater economic benefit than if he would have signed with a team in a high-income tax state, such as California. However, when the media covers items like this, they often overlook the impact of the state of residency of the player. Even playing for a no-tax state team like Texas doesn’t mean the player pays no tax. They still pay income tax to states in which they play away games and to their state of residence, if applicable.

Taxing Signing Bonuses

The state in which a player lives has major tax effects on signing bonuses included in a contract, assuming proper language is included regarding the signing bonus. Signing bonuses are generally taxed based on a taxpayer’s resident state. This means if a player receives a signing bonus from your favorite team, the signing bonus is taxed in the state the player is a resident and not the state the team is located in. Depending on the circumstances, this can save a player millions of dollars in tax savings.

No-Trade Clause

A full no-trade clause can be valuable to players in more ways than one. If a team decides it wants to explore trading a player with a no-trade clause, the player has control over where they are traded. This clause provides peace-of-mind to players in their personal lives but also protects a player from a business perspective. From a tax planning perspective, a full no-trade clause can allow a player to dictate what tax jurisdiction they will be entering if they are traded during their current contract. In addition, additional compensation can be used as a negotiating tactic when it comes to waiving a no-trade clause.

Learn more about Anders Sports, Art & Entertainment Group or contact an Anders advisor to find out how we can help.

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December 26, 2018

Tax Reform for Individuals: Child Tax Credit Changes

Parents and taxpayers with dependent children can take advantage of the increased benefits of the Child Tax Credit under tax reform. With new changes in effect, this tax credit has been enhanced and made available to more individuals.

Previous Law

Under prior law, individuals could claim a credit of $1,000 per qualifying dependent child under age 17 at the end of the year. The adjusted gross income thresholds for taxpayers were $110,000 for joint returns and $75,000 for single taxpayers, so many taxpayers were completely phased out of the credit.

New Law

The new tax law has increased the credit to $2,000 per qualifying child. Additionally, $1,400 of this credit will be refundable for each qualifying child, compared to only $1,000 under the old law. The law also created a new non-refundable credit for non-child dependents of $500 each. This credit can be used for dependents including children 17 and above, parents and disabled dependents who were previously ineligible.

The credit has new modified adjusted gross income thresholds of $400,000 for joint returns and $200,000 for single taxpayers, which dramatically increases the number of taxpayers eligible for the credit. After these thresholds, the credit is reduced by $50 for every $1,000 that income exceeds the threshold.

Impact on Individuals

Personal exemptions have been eliminated under tax reform, so the enhancement of this credit helps ease that burden. This credit is highlighted as a provision that will help lower the tax liability for middle-class families. Additionally, the Child and Dependent Care Tax Credit, which helps families recuperate some of their expenses from daycare, after school care or summer camps, remains unchanged in this bill.

Visit our Tax Reform Resource Center for videos, blog posts and resources on how tax reform will impact you, your family and your business. Contact an Anders advisor with questions on how the new tax law will affect you.

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December 20, 2018

2018 Year-End Tax Planning Strategies

The Tax Cuts and Jobs Act that was enacted last December topples conventional tax planning strategies and changes the familiarity for this year’s tax filing season. Below is a brief review of some of the most important 2018 year-end tax planning ideas for individuals:

Make charitable contributions.

Strategies such as bunching your charitable contributions into one year, or setting up a donor advised fund with a large contribution can enable taxpayers to itemize their deductions in one year and take the standard deduction in the next.

Gift appreciated stock to charity.

Although the market may not be performing at its best over the last few weeks, a donation of appreciated stock has a double benefit.  The charitable deduction is at the full market value of the stock, not the stock basis, and there may be opportunities to rebalance your investment portfolio.

Donate your retirement distribution.

Taxpayers who are age 70 ½ or older, and who still may need to withdraw their Required Minimum Distribution (RMD) for the year, may consider a Qualified Charitable Distribution (QCD).  Up to $100,000 may be directed from the retirement plan directly to a charity. The distribution counts towards the RMD and will not be taxable to the individual. This is a very efficient way to be charitable and still utilize the higher standard deduction benefit.

Evaluate retirement contributions.

Before that last paycheck of the year, it is a good time to evaluate if you can add a little more to your employer retirement plan. Have you maximized your company’s match?  If over the age of 50, did you make the additional available contribution?

Make educational contributions.

If your state allows a deduction to a 529 plan, generally a contribution must be made before the end of 2018 to get the deduction for the year.  And remember, 529 plans can now be used for certain qualified expenses for elementary and secondary schooling.

Consider gifting strategies.

The end of the year is a great time to make annual exclusion gifts.  For 2018, the annual exclusion amount is $15,000 and can be gifted to an unlimited amount of beneficiaries per year without decreasing the lifetime estate tax exclusion amount or paying a gift tax.

Perform an overall financial health check.

Although we are all busy with holiday events, the end of the year is a fitting time to ensure your finances are in good shape and are aligned with your life and financial goals. Do you have an adequate emergency fund? What are your outstanding debt rates and terms?  Should you have a goal to pay those down in 2019?  When was the last time you had an insurance policy review?  Are your beneficiaries still applicable?  Do you need to create or update your will, healthcare power of attorney or other legal documents?

Even though we only have a few days left in 2018, there is still a small window of time for a quick review of your tax and financial situation. If you have any questions about any of these planning ideas, contact an Anders advisor and we would be happy to discuss with you.

Visit our Tax Reform Resource Center for videos, blog posts and resources on how tax reform will impact you, your family and your business.

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December 18, 2018

How the New Revenue Recognition Standard Will Impact the Construction Industry

New revenue recognition standard are effective for nonpublic entities for annual periods beginning after December 15, 2018. Now is the time to assess how these new standard may affect the way your company recognizes revenue and change your company’s internal accounting policies, procedures and financial statements. The new standard will impact the construction industry in specific ways. Below are a few key considerations for the construction industry.

Change Orders

Step one of the revenue recognition process requires you to identify the contract with the customer. New criteria require the combination of contracts when certain criteria are met, such as for contracts that are negotiated together with the same customer and contain interdependent pricing. Previous guidance did not require the combining of contracts.

Under this new requirement, change orders must be assessed to determine whether they are modifications to existing contracts and need to be combined, or whether they represent a new contract. This may require you to develop new internal procedures to analyze and track change orders.  Proper consideration should be given to each change order to ensure the consistency and appropriateness of revenue recognition.

Step two of the revenue recognition process requires you to identify the performance obligation. Initial concerns in the industry surrounded the identification of hundreds of obligations within a typical construction project – architecture, engineering, plumbing, HVAC, electrical, painting, finishing, etc. Additional clarity has been provided to simplify contract obligations. Due to the high level of integration of the multiple facets of a construction project, projects could be considered to have only one performance obligation. It’s important to consider each contract to determine whether a good or service is separately identifiable and benefits the customer on its own. This may require preliminary analysis of contracts that had not previously been done.

Percentage Complete

Percentage of completion is the current status quo in the construction industry, but this method will see some changes under the new standard. Step five of the revenue recognition process requires you to recognize revenue when or as the performance obligation is satisfied. This can be done at a point in time or over time. There are a handful of requirements that must be met to recognize revenue over time, but it is anticipated that a majority of construction contracts previously recorded under the percentage of completion method will meet these requirements.

In order to recognize revenue over time, a company must select an input or output method to determine progress towards completion. Under the current percentage of completion method, this is generally done using an input of costs to date in relation to total estimated costs. While costs are still considered an acceptable input method, a few modifications to the calculation must be considered. For example, any costs incurred due to mistakes or rework must be removed from the calculation. Additionally, materials purchased for a job that haven’t been used or installed yet can only be reflected in revenue to the extent of costs incurred. Contract costs should be tracked and documented in a way that facilitates the determination of their effect on revenue recognition. This may require additional procedures not already in place.

Disclosure

The Financial Accounting Standards Board has limited the required disclosures for private entities, but private entities will likely see changes to their disclosures. First, private entities are required to disaggregate revenue according to whether revenue is recognized at a point in time or over time. Additional information must also be disclosed regarding qualitative factors that affect the nature and timing of revenue. Second, entities must carefully distinguish between contract assets and receivables. Invoicing a client does not solely determine the establishment of a receivable. A receivable is recorded when the performance obligation is fulfilled. Consideration should be given to when an invoice represents a receivable. Third, companies must disclose whether revenue is recognized at a point in time or over time, significant payment terms, and details surrounding any variable consideration. Some relief to this disclosure is provided should the performance obligations and variable consideration meet certain criteria. Lastly, for revenue recognized at a point in time, the significant judgments must be disclosed in the company’s assessment of when a customer obtains control of the goods or service. Each of these disclosures may require an entity maintain additional documentation not previously maintained. Establishing new procedures prior to implementing the revenue recognition standard will help alleviate the challenges during the transition.

While implementing the new revenue recognition standard may seem daunting, the Anders Audit and Advisory Services Group can assist with the transition. Contact an Anders advisor for help establishing new internal procedures, evaluating contracts for revenue recognition requirements or general guidance on the new standard.

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December 17, 2018

You Got a 74 on a Section of the CPA Exam; What Now?

You took the test. You’ve sat waiting for weeks in anticipation. You go to the NASBA website, put in your email and password. And after you coax your hand off the little white box, there, staring back at you in GIANT BLACK FONT is the BIG FAT, 74.

The majority of people along their way to becoming a CPA have this happen, whether on the first or the fourth exam, at least once. No one can truly understand this sinking feeling unless it has happened to them. Others will try to sympathize, but they will never get it.

After your heartbeat has slowed to a normal pace and you’ve shed a few tears, comes the big question: What now? This is not the way things were supposed to happen. This wasn’t part of the plan.

First of all, take a deep breath. Even though it may not feel like it sometimes, the majority of people do not pass all four parts of the exam the first time through. You are in good company. The following are pass rates for 2018 by section:

AUD – 51.76% BEC – 59.07%

FAR – 46.79% REG – 54.46%

That is a lot of people who didn’t pass. As corny as it may sound, it can help to look to the Internet for support. Sites like www.another71.com are created and frequented by people who are in the same boat. It helps to know you aren’t alone.

Next, figure out your new plan. I say new because it was obviously never the goal to fail. It wasn’t meant to be a really expensive pretest. Some people want to continue taking tests in the same order they had intended and re-take the failed section again at the end; some want to take it again immediately so the information is still fresh. It is up to you, and you know yourself best. It feels better to have a plan and get back on track.

Finally, change something about your studying. If you are using one review program, supplement it with another program’s book from Amazon. Maybe you learn better listening than reading; record yourself and listen to notes in the car on the way to work. Everyone learns differently, so don’t think you have to do the study program exactly how they present it.

Just remember, someday soon it will all be over and you’ll have more free time than you know how to fill. I know more people who have gotten a score between 70 and 74 than have passed all parts the first time through. Lots of people who are not as smart as you managed to do it, and you can, too.

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December 14, 2018

Luxury Watch Auctions Net $22 Million

The trend in the world of luxury watches has recently been gaining steam and appears to only be going up. Auction house Phillips, in conjunction with online men’s retailer Mr. Porter and men’s style brand The Rake, held a joint auction titled, Styled. Timeless Watches and How to Wear Them, on December 5th, 2018 in New York. The auction featured 136 unique and rare vintage watches with 135 of the 136 watches selling, earning a little over 11.5 million dollars. This trend is not limited to only vintage watches, however, as according to NPD Group, new luxury watches in the U.S. ranging in price between $5,000-$10,000 are up 14% and sales among watches priced above $10,000 are up 16% over the past year. These two trends, a strong primary and secondary market, entice watch collectors as well as investors who see these timepieces as a safe investment that will hold their value over time.

A Growing Trend

The watch world has seen some truly astonishing results over the past few months. First and foremost was the sale of Paul Newman’s “Paul Newman” Rolex Daytona, a watch so synonymous with the late movie star that his name is always used to describe the watch. This particular watch, auctioned off by Phillips, brought $17.8 million dollars. This result eclipsed a stunning $5 million sale of a Rolex “Bao Dai” in May. However, the more telling sign of the strength of the watch market may be what has transpired in sales on December 5th and 6th.

The aforementioned Phillips sale from December 5th, 2018 is particularly telling because it lacked the truly iconic piece owned by a movie star or historical figure. Phillips sold rare and unique watches, none of which carried exceptional provenance, and averaged over $85,000 per watch. The sale was heavily comprised of highly coveted vintage Rolex Submariners and Daytonas and sparsely issued Patek Philippe dress watches in precious metals.

Another high-profile sale was held on December 6th, 2018 by auction house giant Christies. Among the watches auctioned off was a pocket watch gifted to Franklin Delano Roosevelt by his wife, Eleanor, on their wedding day. Of the 160 watches listed 128 were sold for a total of $10.5 million dollars. This particular auction was comprised of luxury watches from all the major Swiss manufacturers and was stocked with exotic dialed Rolexes, dials in colors other than variations of black and white, Day-Dates and Date-Justs in 18k gold. Most notably sold were a rare Rolex from 1952 and Franklin D. Roosevelt’s pocket watch which sold for $1.5 million and $65,000 dollars respectively.

Who is Buying?

It would seem that with the tens of millions of dollars pouring into the watch market the market’s base has widened to include not only aficionados but also those who see watches as investments or stores of value. Speculation has been occurring more and more over the past few years and has driven the price of certain watches up well over 500%. For example, the type of watch that set the world record for the highest grossing watch, the Rolex Daytona. Five to ten years ago these watches were routinely sold on the secondary market, in the same condition and of the same reference, for anywhere between $20,000-$35,000. Currently, at this point in 2018, most of these watches go to auction with a reserve (a minimum bid that must be met for the watch to sell) of $100,000 dollars. Price increases of this kind have taken place across the board in the vintage luxury watch market, as seen in the two auctions in December.

With two Industry giants holding large scale live auctions in back to back days the strength of the vintage watch market was put to the test and inarguably passed by bringing in $22 million dollars on the sale of 263 watches. Having both a thriving primary watch market and secondary watch market keeps the value of luxury watches high and the increased interest from those who see watches as an investment is sure to continue to send the prices of watches upward.

If you have a watch collection or other memorabilia you would like to have valued or auctioned, the Anders Sports, Arts & Entertainment Group can help. Contact an Anders advisor to learn more.

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December 12, 2018

Economic Nexus by State Following South Dakota v. Wayfair

The decision of South Dakota v. Wayfair is causing states to enforce economic nexus laws to collect sales tax from out-of-state sellers with a connection to the state. These laws affect online retailers and multi-state businesses who collect revenue up to the threshold amount in a state.

To understand which states your business may be liable to pay sales and use tax in, we compiled a chart with each state’s economic nexus threshold, criteria and enforcement date. The chart is updated regularly as states adjust their requirements.

Complete the form below to download the latest version of the Economic Nexus by State chart.

Learn more about the South Dakota v. Wayfair decision.

Updated 2/20/2020

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December 11, 2018

Tax Reform for Individuals: Estate and Gift Tax Increases

The Tax Cuts and Jobs Act has the estate and gift tax exemptions on the rise. These exemption increases may provide the opportunity for further tax planning. Below we highlight what changed for estate and gift tax under the new tax law.

Previous Law

For 2017, the previous tax code provided that a single taxpayer may gift up to $5.49 million, indexed for inflation, in their lifetime before becoming subject to gift tax.  This lifetime threshold would only be reduced if the taxpayer gifted more than the annual gift tax exclusion of $14,000.

New Law

The new tax bill provides an increased benefit when it comes to the estate and gift taxes. Tax reform has drastically increase the estate and gift tax exemption from $5.49 million in 2017 to $11.18 million in 2018 for an individual. The exemption is also indexed for inflation and is set to rise to $11.4 million in 2019. Beginning after 2025, the exemption amount will revert back to the pre-2018 level of $5 million, indexed for inflation.

The annual gift tax exclusion increased to $15,000 in 2018 compared to $14,000 in 2017.  If a taxpayer gifts more than $15,000 to a single person, the excess will reduce their lifetime gift exemption of $11.18 million. Lifetime gifts that exceed the lifetime gift exemption are taxed at 40%.

The IRS issued proposed regulations to clarify the computation of estate tax payable in situations where the lifetime exclusion was different in the year of death than when prior gifts were made. The individual is allowed to use the larger of the lifetime exemption on the date of the decedent’s death or the total amount of lifetime exemption used in determining taxable gifts during the taxpayer’s lifetime.

Impact on Individuals

This individual tax reform provision is set to sunset at the beginning of 2026. This provides a limited window to allow a couple the opportunity to utilize the larger lifetime exclusion. It could be very beneficial to make these gifts while the new tax law is in place.

With such high thresholds, the vast majority of estates will not be subject to the estate tax. Please keep in mind some states have their own estate and inheritance tax which should be considered.  Focus may shift to keeping assets in estates to benefit from the step-up in basis and reducing income tax for heirs. Because the exemption has increased substantially, prior estate planning should be revisited to ensure your estate plan reflects any changes in the law.

Contact an Anders advisor with any questions on how these changes may impact you, or learn more about tax reform changes in our Tax Reform Resource Center.

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December 6, 2018

Requirements for Filing Form 1099-Misc

A Form 1099-Misc reports certain types of income, other than salary, that aren’t filed on a W-2. If you’re a business owner or independent contractor, determine if you should issue or file Form 1099-Misc. The most common expenses a Form 1099-Misc is issued for are:

  • Services performed for a trade or business by people who are not treated as your employees, are not incorporated and paid at least $600 in the calendar year.  Examples are subcontractors, consultants, professional services such as legal, computer consulting, accounting, cleaning, and lawn care
  • Services of at least $600 paid to attorneys, regardless of entity type
  • Rental expenses, prizes and awards, other income and director fees of at least $600
  • Royalties of at least $10

To issue the 1099s the recipient should provide to you:

  • Tax identification number, which is either your Social Security Number or company Federal Identification Number
  • The name that corresponds with your tax identification number. In order to avoid possible matching notices with the IRS, make sure that the name matches exactly as it is on file with the IRS
  • Street address, city, state and zip

The 2018 Form 1099-Misc reporting nonemployee compensation payments in box 7 is due on or before January 31, 2019 to the IRS and to the recipients.  This is an earlier filing deadline from years past. The earlier due date is an effort by the IRS to prevent tax refund fraud by income matching earlier in the year. Failure to file penalties are $50 to $270 per information return and intentional disregard of filing penalties are $540 per information return with no maximum penalty.

If you have any questions about filing requirements for Form 1099-Misc, contact an Anders advisor.

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December 6, 2018

QuickBooks Online Tips for Small Businesses: Sales Receipts and Invoices

Part One in a Series on How to Make Accounting Easier with QuickBooks Online

When selling goods or services, businesses need to create a record of the transaction for accounting purposes. Depending on the situation, you will either give customers an invoice or receipt. Recording these sales transactions within QuickBooks Online (QBO) without understanding the accounting can cause a major headache down the road. If you are having trouble deciding whether to use a sales receipt or an invoice in QBO, think about the actual cash flow between the buyer and seller at the point of sale.

Sales Receipt vs. Invoice

Sales receipts record income on a cash basis by using a one step process that enters the payment information at the same time you are entering the sale. Sales receipts are used for goods and services at the time of purchase. This is sometimes referred to as “point of sale”.

Sales Receipt Example
A company sells clothes to a customer who pays cash at the point of sale. The company should issue a receipt acknowledging the acceptance of cash. In this example, cash was exchanged at the point of sale.

An invoice is a request for payment for goods or services. Invoices record income on an accrual basis using a two-step process. The first step is to record the income and the receivable from the customer by entering an invoice. The second step is recording the payment received from the customer by releasing the receivable and recording the cash in the bank account.

Invoice Example
A company performs landscaping services for a customer. Payment for the services are due in 30 days. The company will issue an invoice to inform the customer how and when to make the payment.  When the customer pays the bill, the company will record the cash received and release the receivable.

How QuickBooks Online Can Help

Once you’ve determined how payments will be collected and made, categorizing them in QBO is a vital step to making sure your financials are consistent and organized for your accounting team or outsourced experts.

To enter a sales receipt in QBO click the Plus icon in the top right-hand corner of the screen. Then select “Sales Receipt” under the client column. The new screen will allow you to add the basic details of the sales transactions, such as:

  • Customer
  • Date
  • Payment method
  • Quantity
  • Amount
  • Product/Service

Similarly, you will enter an invoice by selecting the Plus icon in the top right-hand corner.  Then select “Invoice” under the client column.  The invoice screen has the same inputs as the sales receipt with the exception of the payment method.   There is also a Terms field on the invoice screen that allows you to tell the customer how quickly they need to remit the payment to you.

Correctly categorizing your transactions in QBO will give you an accurate snapshot of your receipts and invoicing. While these processes are important, they are just a small piece of the accounting puzzle. To see how Anders can help relieve you of the day-to-day accounting while providing a real-time snapshot of your financials, contact an Anders advisor or learn more about Anders Outsourced Accounting Services.

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