Austin Buckett

BiggsKofford’s Senior Tax Partner, Greg Gandy, recently celebrated his 25th anniversary with the firm. During his 25-years at BiggsKofford, Greg has become the cornerstone of our firm’s Tax Practice as well as the leader of our Real Estate and Construction industry group. We are so pleased to celebrate this major career milestone with Greg.

Late Friday afternoon the IRS issued proposed regulations (which were published Monday morning) regarding transfers (money or in-kind) to state agencies or charitable organizations in exchange for state tax credits.

The proposed regulations state that if the Taxpayer is receiving a State or Local tax credit for the contribution made, the credit received will reduce the amount of such charitable contributions claimed on their Federal tax return. However, taxpayers can disregard this new rule if the credit does not exceed 15% of the taxpayer’s payment or 15% of fair market value of the property contributed.

In summary the amount of your Federal Charitable Contribution will be reduced by 100% State Income Tax Credit that is received. The summary is clear that is does apply to pre-existing State tax credit programs that were in place before the enactment of the TCJA of 2018.

For example, if XYZ contributes $50,000 to a qualified charitable organization on 8-28-18. The payment creates a $25,000 State Tax Credit. The amount deductible on XYZ’s Federal Income Tax Return would be $25,000 ($50,000 contribution less the $25,000 State Tax Credit).

This proposed regulation applies to all state credits received arising from charitable contributions made after Aug. 27, 2018.

We will keep you posted on any additional changes. Please feel free to contact us directly to better understand how this will impact you.

To review an article from the Journal of Accountancy click here, or see below:

Under proposed regulations issued by the IRS on Thursday, transfers to a state agency or charitable organization in lieu of paying state and local taxes would be deductible as a charitable contribution only to the extent that the taxpayer making the donation did not receive a quid pro quo (REG-112176-18). Contributions that result in a state or local tax credit in return for the contribution would not be deductible for federal tax purposes to the extent of the credit; however, contributions that result in a state or local tax deduction may be deductible for federal tax purposes.

A number of states have enacted or are considering enacting programs that allow residents to make contributions to state agencies or charitable organizations in exchange for state and local tax credits. These programs are designed to allow individual taxpayers to claim charitable contribution deductions that are not subject to the new $10,000 limit on the deductibility of state and local taxes under P.L. 115-97, the law known as the Tax Cuts and Jobs Act (TCJA). In New York, for example, local governments and school districts can create charitable funds and offer donors a property tax credit. New York has also created a state charitable gifts trust fund, which permits taxpayers to make contributions for health care or education in return for a state tax credit (donors would also, presumably, attempt to take a federal charitable contribution deduction) (2018 N.Y. S.B. 7509, ch. 59). In New Jersey, taxpayers can make donations to municipal or school charitable funds and receive property tax credits (2018 N.J. S.B. 1893).

The proposed rules outline the history of the IRS’s and courts’ positions on whether a donor has received something of value in return for the charitable contribution, in which case the deduction under Sec. 170 must be reduced or eliminated. The IRS also discusses the rulings it has issued in this area permitting these deductions in certain cases (see, e.g., Chief Counsel Advice 201105010) and explains that the fact that taxpayers making these donations can now reduce their federal tax liability requires it to revisit the issue. The Service also notes that permitting the deduction would greatly reduce the amount of revenue the federal government would collect from taxpayers avoiding the $10,000 limitation.

To achieve the goals of prohibiting charitable contribution deductions when a taxpayer is receiving a benefit in return, the proposed regulations provide that if a taxpayer makes a payment or transfers property to or for the use of an entity listed in Sec. 170(c), and the taxpayer receives or expects to receive a state or local tax credit in return for that payment, then the tax credit constitutes a benefit, or quid pro quo, to the taxpayer, and the taxpayer must reduce his or her deduction for the charitable contribution by the amount of the state or local tax credit received or expected to be received.

However, the proposed rules allow a charitable contribution deduction if the state program allows dollar-for-dollar state or local tax deductions instead of credits. The IRS reasoned that even though deductions could also be considered quid pro quo benefits, sound policy considerations and efficient tax administration support making an exception to quid pro quo principles for dollar-for-dollar state or local tax deductions. Because the benefit of a dollar-for-dollar deduction is limited to the taxpayer’s state and local marginal rate, the risk of deductions being used to circumvent the $10,000 limitation is comparatively low. In addition, if state and local tax deductions for charitable contributions were treated as quid pro quo benefits, it would make it difficult for taxpayers to accurately calculate their state and local taxes and federal taxes.

The proposed rules also contain a de minimis exception from the prohibition of a deduction for state and local tax credits. Under this rule, a taxpayer may disregard a state or local tax credit if the credit does not exceed 15% of the taxpayer’s payment or 15% of the fair market value of the property the taxpayer transferred. This exception reflects that the combined value of a state and local tax deduction, that is the combined top marginal state and local tax rate, currently does not exceed 15%.

The proposed regulations apply to taxpayers making contributions to state tax credit program created after the TCJA as well as preexisting state tax credit programs created before the TCJA. The regulations are proposed to apply to contributions after Aug. 27, 2018.

The IRS is requesting comments on all aspects of the proposed rules within 45 days after their publication in the Federal Register (scheduled for Monday, Aug. 27) and is planning to hold a public hearing on Nov. 5 in Washington.

The Colorado Enterprise Zone Program creates a business friendly environment in economically distressed areas by offering incentives to businesses and projects in such areas. If your business is located in one of the Colorado Enterprise Zones, you may be eligible to claim various Colorado tax credits based on your purchases of qualified equipment, facility expansion, the hiring new employees and many other business activities. Click here to learn more from the CO Dep. of Revenue.

Pre-certification can be filed at any time prior to commencing the activity. The process is very simple and takes less than 15 minutes. In addition, if you don’t perform activities during the year that would earn you any of the respective credits you have no further commitments. Click here to determine if you are located within one of the zones.

Click here to complete the pre-certification online application.

If you determine that you are located within an enterprise zone and would like us to assist in the pre-certification process please do not hesitate to contact us at 719-579-9090.

We are excited to announce the promotion of Nick Phillips to Senior Merger & Acquisitions Associate. Phillips joined BiggsKofford CPA firm in 2013 and worked as a Senior Tax Associate before being promoted into the firm’s M&A division.

Colorado Springs CPAPhillips graduated from the University of Colorado at Colorado Springs. He is a Certified Public Accountant (CPA) and is a Certified Merger & Acquisition Advisor (CM&AA).

“Nick’s abilities in both financial analysis and taxes provide a unique combination of skills that allow us to advise our clients through the largest financial events of their lives,” said Christian Blees, Director of BiggsKofford.

Founded in 1982, Colorado Springs-based BiggsKofford currently employs more than 30 people. BiggsKofford CPA firm offers integrated business solutions, including tax, attestation, virtual accounting, and consulting services.

BiggsKofford Capital, LLC was launched by BiggsKofford CPA firm approximately 15 years ago to provide investment banking services. Since that time, BiggsKofford Capital has represented hundreds of privately-held middle-market clients, throughout the United States, complete acquisition and sale transactions.

 

Completing your residency and fellowship and successfully landing your first position is a great success.  This time can also be chaotic and full of changes.  Many times you have relocated to your first position and are experiencing financial changes as well.   Now that you have steady earnings, you should create a plan for your finances.

It is far easier to get off to a good start and follow a winning plan than it is to adjust bad habits and face regret years from now.  We have created a general checklist to help you get started, please note that these guidelines are not a one size fits all solution.  Coordinating with your CPA or financial planner is always an integral part of financial planning.

The Golden Rule:  Spend Less than You Earn

Year of hard work deserves reward, as a new physician you have likely spent countless years living modestly and are excited to reap the benefits of high income levels.  Enjoying the fruits of your labor is a very different experience than jumping into a lifestyle of your colleagues that have been working physicians for 10 years.  It is important to avoid “lifestyle creep”.

Lifestyle creep might covertly enter your post-medical school world as a few nicer things here and there, however slow and cautious improvements are in order.  Perhaps a new vehicle, first home, family vacation and the ability to occasionally dine out may be part of your new lifestyle.

Often times, these changes can get out of hand when they morph into sports cars, extended or luxurious trips, a seven-figure home, or constant entertainment and fine dining nights out.

What are the pitfalls of overspending? In a word, freedom. Once you adjust your standard of living upward it can be very difficult for you and your spouse to later cut back and bring down that standard of living.  If you regularly spend your bank account down and credit cards up, you will be dependent upon the next paycheck to keep afloat.  Lifestyle creep will restrict your professional and personal flexibility.  Long term, it will impede your ability to retire.

How do you accomplish the goal of spending less than you earn?  While not fun to hear, you should create a budget to spend similarly to what you did in medical school during the first few years of practice.  The long term benefits of these few years of modest lifestyle increases are numerous.  You can utilize this additional cashflow to pay down credit card debt and student loans as well as starting your retirement contributions (often with employer matching).  This will put you on the path to long term financial freedom.

Do Understand Your Cash Flow

Young professionals run into trouble when there is simply no mechanism to see how much comes in and how much goes out of their bank accounts each month. Lack of visibility leads to spending everything that seems available.  This can result in absence of saving or worse, spending too much and running up credit card balances.

How do you manage your spending?  Start by setting up your paycheck to take advantage of retirement matching benefits being offered by your company.  Then set up withholding based on your CPA’s advice or estimate.  What you can then see is what your monthly net paycheck or inflows to your household account will be as a result.

Write down the fixed expenses you know you’ll have to pay each month: rent or mortgage, auto loan payment, phone, cable/internet, average utilities, student loan payments, and other minimum debt payments such as credit cards.  Once you have a good view of this category consider spending an afternoon renegotiating a cable bill or rebidding car insurance to tighten this category as much as possible.

Subtract this expense total from your monthly take-home pay.  This leaves you with variable expenses, these are the expenses that change from month to month.  These expenses need to last you a four week period.  Over the four weeks of the month you will incur and cover variable expenses, such as gas, groceries, eating out, entertainment, investment savings, additional principal payments on debt and surprises.   You’ll quickly get familiar with your weekly figure available and how much goes toward those needed items like groceries and gas and find ways to cut out optional over spending such as eating out or entertainment.   If you are lucky enough to find yourself at a comfortable amount of spending with excess cash available, opt for savings or extra debt payments.

Generally the first two years in practice are spent as an employee.  This is prime time to set good spending habits and create a savings structure to benefit you and your family long term. Over time, earnings increases as you become a partner in your practice and establish yourself in the community.  As this happens your monthly discretionary or variable spending bucket results in a surplus, then you can look to add on an upgraded car payment, country club membership or other splurge in monthly spending.

Regardless of what you choose to adjust, awareness of your cash flow will drive better decisions.

Understand your Tax Liability

Once of the largest expenses you will contend with as a high income earner is your tax liability.  Understanding how much you pay, and why, will serve you well for the rest of your professional career and beyond.  Start by finding a good advisor to walk you through the process.

Many physicians find themselves as business owners within a few years of starting their career.  Training on how to be a successful business owner generally isn’t part of the curriculum in becoming a physician.  Walking through the process of how income and taxes are handled for physicians that own a business is very different and often times more advantageous than paying taxes as an individual.  As a business owner you have the ability to tap into the power of the pre-tax dollar vs an after-tax dollar.

Most physicians have a high enough income level to place them in the highest tax bracket.  If a person has the ability to pay for expenses with pre-tax dollars a business owner is getting a 40% discount on everything they buy.  Understanding how to position yourself to provide medical services through a business, at least in part, can be highly beneficial to your long term financial health.

We are thrilled to announce the promotion of Eric Morgan, CPA to Senior Manager, in the firm’s tax department. Morgan joined the firm in August of 2006.

Morgan received his undergraduate degree from Brigham Young University and his MBA from the University of Colorado – Colorado Springs. In addition to accounting, Morgan enjoys reading and spending time with his family, as well as tracking sports and current events.

“Eric is trusted by his clients and the Partners at BiggsKofford to provide personalized service that is both technically accurate and relevant to our clients’ specific needs,” said Greg Gandy, Director of Taxation at BiggsKofford. “Eric has demonstrated the dedication and loyalty to the firm and our clients that is worthy of the title Senior Manager.”

Founded in 1982, Colorado Springs-based BiggsKofford currently employs more than 30 people. BiggsKofford offers integrated business solutions, including tax, attestation, virtual accounting and consulting services. BiggsKofford continues to expand its services to meet the changing needs of over 500 business owners and entrepreneurs in Colorado’s Front Range.

BiggsKofford has become aware of some changes at the Internal Revenue Service that we wanted to pass on to you. Recently, we have noted an increase in the occurrences of IRS field agents appearing at taxpayers’ places of business with no advance notice. In conversing with some of these agents, we learned that the IRS recently changed its posture to give much greater emphasis on in-person contacts with taxpayers. The belief is that the in-person contacts will have a better chance of getting taxpayers’ attention than just sending letters in the mail.

The trigger for these visits is if a taxpayer has an outstanding issue, such as unfiled tax returns, balances owed, or notices received that have not been responded to. If you are compliant with your income and payroll tax obligations, then this should not happen to you. You could still be subject to a regulatory audit, but the initial contact for that would be through correspondence in the mail.

In the event a revenue agent (or person claiming to be such) appears in your place of business, please be assured that you are not obligated to begin discussing your case with them on the spot. You can ask to see their official badge, and they will typically leave a business card with the IRS logo on it. They will want you (or an authorized representative) to call them back by a specified date.

We know that having a revenue agent show up at your business unannounced can be an intimidating experience. If this happens to you, BiggsKofford can call the agent under power of attorney to gain an understanding of the situation, and then work with you and the agent to get it resolved as quickly as possible. We also have the means to validate that the person is a legitimate agent and not a scam.

As always, if you receive a phone call that purports to be from the IRS and threatens a lawsuit, criminal charges, or similar, then it is highly likely to be a scam. The IRS does not normally initiate contact with taxpayers over the phone.

Please contact Greg Gandy, Michael McDevitt, or Deborah Helton if you have any questions about this information.

We recently became aware of a fraud scheme targeting 401(k) plans and wanted to bring it to your attention.

In this scheme, a fraudster calls the 401(k) plan custodian or third-party administrator (“TPA”) and impersonates a plan participant. First, the fraudster changes the email address on file so the participant will not receive notice of subsequent changes and then the fraudster requests a loan against the participant’s account. Most TPA’s require some form of identification verification before fulfilling these requests. However, it appears the fraudster has obtained the information necessary to “verify” the participant’s identity from other sources (most likely from a separate data breach, e.g. Equifax). After “verifying” the participant’s identity, the fraudster then directs the loan proceeds to his or her own account via ACH or other electronic transfer.

To mitigate the risk of this scheme, we recommend that companies with 401(k) plans contact their 401(k) plan custodian/TPA to ensure controls are in place to:

  1. Require that every time a change is made to a participant’s account profile (e.g. email address, physical address, ACH account number, etc.), notification is sent to BOTH the old and the new email address
  2. Require authorization from the plan administrator (i.e. the person at the company/plan sponsor responsible for the 401(k) plan) for all disbursements from the plan (including distributions AND loans)
  3. Require that all disbursements be mailed as paper check to the physical address on file for the requesting participant

If you have any questions regarding what you can do to mitigate this risk, please call BiggsKofford at 719-579-9090.

The Journal of Accountancy recently published an article disussing changes in HSA Contributions.  You can see the article below, or click here to read the original.

The IRS announced on Thursday that it is modifying the annual limitation on deductions for contributions to a health savings account (HSA) allowed for taxpayers with family coverage under a high-deductible health plan (HDHP) for calendar year 2018. Under Rev. Proc. 2018-27, taxpayers will be allowed to treat $6,900 as the annual limitation instead of the $6,850 limitation announced in Rev. Proc. 2018-18.

The IRS is making the change to allow taxpayers to use the limitation it originally announced in Rev. Proc. 2017-37, which was issued last May. The limitation was revised in Rev. Proc. 2018-18 after the passage of P.L. 115-97, known as the Tax Cut and Jobs Act, which mandated new calculations of various inflation-adjusted amounts, including HSA limitations.

After the IRS announced the new lower limit, it heard complaints from individual taxpayers and other stakeholders, including employers and payroll administrators, that the change would be difficult and costly to implement. They also noted that some taxpayers with family coverage under an HDHP had made the maximum HSA contribution for 2018 before Rev. Proc. 2018-18 was issued and many others made annual salary reduction elections for HSA contributions based on the announced $6,900 limit.

To rectify this problem, the IRS is allowing taxpayers to treat $6,900 as the annual limitation on deductions for an individual with family coverage, and an individual who receives a distribution from an HSA in excess of the $6,850 limit published in Rev. Proc. 2018-18 may treat that distribution as the result of a “mistake of fact due to reasonable cause” under Q&A-37 of Notice 2004-50. The portion of a distribution (including earnings) that an individual repays to the HSA by April 15, 2019, will not be included in the individual’s income under Sec. 223(f)(2) or be subject to the 20% additional tax under Sec. 223(f)(4). The repayment will not be subject to the excise tax on excess contributions under Sec. 4973(a)(5).

An individual who does not repay such a distribution will also not have to include it in gross income or pay the 20% additional tax, as long as the distribution is received on or before the individual’s 2018 tax return filing due date (including extensions). However, this treatment does not apply to distributions from an HSA that are attributable to employer contributions if the employer does not include any portion of the contributions in the employee’s wages because the employer treats $6,900 as the annual limitation on deductions under Sec. 223(b)(2)(B). In that case, the distribution is includible in the individual’s income and subject to the 20% additional tax unless it was used to pay for qualified medical expenses.

The IRS released Bulletin 2018-10 a few days ago.  Most notable is the changes to HSA limit for family coverage.  There has been no change to individual limits.

For calendar year 2018, the annual limitation on deductions under Internal Revenue Code Section 223(b)(2)(B) for an individual with family coverage under a high-deductible health plan is $6,850, down from $6,900.

A “high deductible health plan” is defined under Section 223(c)(2)(A) as a health plan with an annual deductible that is not less than $2,700 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed  $13,300 for family coverage. This definition has not changed since the IRS’ previous announcement.

You can see the entire bulletin here. 

Please feel free to contact us with any questions.

Are you curious how the government shut down will affect your taxes?  Here’s an article from the Journal of Accountancy that lays out what to expect.  What to expect during shutdown.

We would like to thank everyone for coming to our presentation on January 10th covering the Tax Cuts and Jobs Act. If you weren’t able to attend, or if you would like to review the presentation, the slides are available below.

Do not hesitate to contact us about questions you have about how this new law will impact you.

Tax Cuts and Jobs Act Presentation

Our clients have been asking about the possibility of prepaying real estate taxes due in 2018 before the end of 2017. 

Thousands of homeowners are rushing this week to prepay their property taxes before the new tax legislation caps the amount of state and local taxes that can be deducted at $10,000.

The IRS on Wednesday announced that taxpayers can prepay their 2018 property taxes only if they have already received a tax assessment from their local government and they make payment by the end of the year.

Please contact BiggsKofford to review your particular situation prior to prepaying your real estate taxes before year end.

Today the Administration released an initial overview of the upcoming proposal. Our anticipation for today’s release was significantly greater than what details were actually given.  The plan has not yet been released and what was discussed today was simply a broad overview. However, this does give us an initial look of what will come in the following months.

Sadly, there has been no specific date given for when actual details will be available.  We will post updates as they come in. In the meantime we’ve assembled the few details currently available. We, like many, have more questions than answers. Take the following for what it is, our summary of the limited information available.

  • 3 tax brackets (but really 4) – No Income brackets yet
    • 0% $0-$24,000 (Possibly for MFJ)
    • 10%
    • 25%
    • 35%
  • Double the current Standard Deduction
  • Eliminate alternative minimum tax
  • Eliminate 3.8% Medicare tax on net investment income
  • Eliminate Estate tax
    • Immediately Remove
  • Eliminate nearly all deductions except:
    • Mortgage Interest
    • Charitable Contributions
    • Retirement Savings
  • Corporate Rate reduced to 15%
    • Possibly on S Corps as well
      • Available to small and medium size business and corporations
      • Rules in place so wealthy people can’t create pass-through to avoid paying higher tax rates
    • Territorial System
      • S. Companies pay tax on income related to U.S. activities not on income earned outside of the U.S.
  • One time tax on overseas profits

We regularly have clients ask us about the pros and cons of purchasing rental properties as ways to supplement their income and create long-term investments. Stagnant interest rates on investments and the current real-estate market has pushed many of our clients into this activity.

No matter what your reason for considering rental activities you will encounter a laundry list of potential pros and cons related to your taxes at the end of the year.   This is by no means a complete list of the benefits and drawbacks of venturing into rental activities; being a CPA firm, we will focus only on the potential tax impact.  Having a discussion with a Financial Advisor of alternative investments may help you identify if rentals are right for you.

If you aren’t a real estate professional there are some pitfalls to be aware of, rental activity is passive and has some loss deduction restrictions. Here are some high points regarding rentals.

Pros:

  • Positive cash flow with the potential to offset ordinary income. For most taxpayers, rental properties result in a taxable loss due to the depreciation deduction allowable.
    • If your adjusted gross income (AGI) is lower than 100,000 per year up to 25,000 of losses can offset other ordinary income. Phasing out by AGI of $150,000
    • Types of Deductions: Depreciation, operating expenses, property taxes, repairs and maintenance, utilities, professional fees, and others.
  • Good long term investment opportunity
  • Potential appreciation of property at date of sale.
  • Passive losses accumulate and can offset gain on eventual sale of the property.

Cons:

  • Upon sale of the property any depreciation expense taken in prior year will convert a portion of your gain to a 25% capital gain rate.
    • You can attempt to manage your tax liability by selling the property in years with lower income.
  • Additional administrative responsibilities.
    • You will need to maintain accurate records of income and expenses related to your rental property
    • Based on preference, you may need to engage a property manager to perform rent collection, repairs, and reference checks for potential tenants.

We can help identify how your personal taxes would be impacted by investing in a rental property.   Proper planning can mitigate year end surprises and potentially undesirable tax consequences.

Over the next few months you are going to be reading and hearing a lot about potential tax law changes that are being recommended by the new administration. The purpose of this article is to look into the future and determine what the tax landscape might look like by reviewing the tax proposals of President-Elect Donald Trump and also a tax proposals from Speaker of the House Paul Ryan.

Before we get into reviewing potential tax law changes, let’s step back and review the life cycle of a tax bill. The part of the government that deals with the introduction of all tax bills is the House of Representatives. All of the bills are drafted and reviewed by legislative committees to include the House Ways and Means Committee.

Once a bill has passed the House of Representatives, which requires majority vote, it is sent to the Senate for consideration. In the Senate the bill is reviewed by tax legislation and finance committees.

Once the billed has passed the Senate, which also requires a majority vote, it is sent to the President for his signature.

With tax law first being introduced by the House of Representatives, most observers feel that attention needs to be directed not only toward the Trump tax proposals but also those that have been put forth by Speaker of the House Ryan.

The best way to compare and contrast the tax polices of both President-Elect Trump (Revised Plan) and Speaker of the House Ryan is to put them side by side. Please see the attached chart, here.

As can be seen by the comparison, the following can be surmised with respect to potential tax law changes. The provisions below are where the Trump plan and the Ryan plan are in unison:

  • Reduction in individual income tax rates
  • Elimination of individual alternative minimum tax
  • Elimination of estate tax and generation-skipping tax
  • Elimination of the 3.8% medicare tax on net investment income
  • Increased standard deductions
  • Elimination of personal exemptions
  • Cap on itemized deductions
  • Reduction in corporate income tax rates
  • Elimination of corporate alternative minimum tax
  • Revised expensing rules (depreciation and interest expense) for businesses
  • One-time tax on expatriated profits returned to the United States

It is not known the timing of any new tax legislation or what the effective dates would be, if enacted. Whatever lies ahead your advisors at BiggsKofford will keep you abreast of changes that will impact you and your business.

Gregory L. Gandy, CPA

Tax Director, BiggsKofford

 

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