Probably not the simple answer you were hoping for. Below are some general questions you should ask yourself when selling your farm.
Question 1: What am I selling?
Each type of asset sold in a farm may be treated differently for tax purposes. The following assets are typical of a farm:
Personal Residence: If you have been actively farming the farm, then you most likely live there. This portion of the gain is not taxable so long as you meet the requirements for sale of your home, such as having lived in the residence 2 out of the last 5 years. Assuming you qualify, this gain is TAX-FREE.
Land (1231 Property): Land, since it is not depreciated is treated as 1231 GAIN subject to the capital tax rates. Capital tax rates are currently 15%/20% depending on your ordinary tax rate bracke
Single-Purpose Farm Buildings (1245 Property) : Most farmers have buildings for a specific purpose, or a single-purpose. 1245 Property is subject to your ordinary tax rate.
Other Buildings (1250 Property): Buildings that are used for multiple purposes, or have never been Section 1245 property. Usually 1250 property is depreciated using a form of straight-line. Therefore, you would have “Unrecaptured Section 1250 Gain” which is taxed at amaximum rate of 25%, to the extent of any gain realized.
Question 2: How much do I allocate to each type of asset?
There is no exact science on this. No two farms are exactly alike, so you may want to look at the following to help you determine the value of each type of asset:
Property Assessment Values
Original allocation when you purchased the farm
Other Sales around the area
Whatever method you use to determine value, does it make sense? You may want to review this with your tax advisor, as well.
Question 3: How do I report the sale?
You can report the sale in the year of sale. However, there are other options that may be available, such as:
Installment Method: This is a sale of property where you receive at least one payment after the tax year of the sale. The advantage of an installment sale is that you can spread the gain of your sale over several years and report gain based on the payments received during the tax year. However, any depreciation recapture under section 1245 or 1250 that is taxed as ordinary income is to be reported in the year of the sale, even if no payments have been received.
Like-Kind Exchange (Section 1031):No gain or loss is recognized. Any gain or loss or loss realized, but not recognized, adjusts the basis of like-kind property received in exchange. It is important that if you consider to doing a like-kind exchange you contact your tax advisor and attorney so that proper procedures are followed, and therefore, the sale of one property in exchange for another qualifies as a Like-Kind Exchange in the eyes of the IRS.
Question 4: Am I subject to the 3.8% Additional Medicare Tax on the gain of the sale?
That depends. In most cases farming is a trade or business. If you are actively participating in the operation of the farm, then you would not be subject to the tax. Check with your tax advisor if you are unsure if you meet the requirements.
Question 5: What next?
This is only the tip of the iceberg. This by no means encompasses all that is involved in a farm sale, but it is food for thought. There are many other questions, such as:
Are there rules I should know about how my state treats capital gains?
If there are tax consequences to the sale, how much should I keep on hand for paying the taxes?
So, if you are considering selling your farm, get together with your tax advisor and/or attorney BEFORE the sale actually takes place. Reach out to us today at 717-569-2900 to review the gains related to your situation and come up with a plan that suits you.
Most businesses today accept credit cards from consumers as a form of payment. The process of accepting credit cards for payment of goods or services helps to guarantee the collectability of customer account balances. Additionally, during difficult economic conditions, the use of credit cards may be the only method available for consumers to pay for their intended purchases.
When a business makes a sale, and the customer pays with a credit card, the overall objective is for the funds to be deposited into the company’s business bank account. As indicated by Stephen Pedneault, CFE, CPA/CFF in his article, “Credit Card Blues” in the January/February 2011 FraudMagazine release, Pedneault writes, “Credit cards are processed through a merchant bank, which charges a monthly fee along with a percentage of each sale transacted. The percentage varies depending on the card processed and the size of the transaction. The corresponding deposit into the business account can be gross (for the full amount of the sales transactions processed) or net (the sales less deducted applicable fees associated with the sales). Gross sale deposits are desirable for reconciling activitybecause the fees and discounts are taken as separate transactions periodically” (Pedneault 26).
Although credit cards can increase the collectability of customer sales, these forms of payment create a platform for organizations to become victims to their own employees’ fraudulent acts. A common method where businesses become prey to their own employees is when their workers have the ability to process refunds and credits. If there is a lack of internal controls in this area, employees might have the opportunity to authorize fraudulent or fictitious credits or refunds to their personal credit card. Additionally, when unauthorized credits or refunds are initiated on business days where there are large or above-average sales, the fraudulent transactions could become absorbed into the details, causing the deposits to appear legitimate while simultaneously resulting in lower funds being deposited into the business bank account.
In order to combat this common area of fraud, we recommend that business owners accepting credit cards as methods of payments adopt the following internal control procedures:
Ensure a company form is completed each time a refund or credit is to be processed. The form should list the name of the employee authorizing the transaction, the amount and reason of the refund or credit and the name of the employee granting the return.
Only permit refunds or credits to be returned to the credit card that was originally used for the initial sale transaction.
Require an employee in the management level to authorize and authenticate every credit or refund.
Make certain all refunds or credits are supported by appropriate company documentation.
Guarantee employees designated to authorize refunds or credits are independent of employees actually processing the refunds or credits.
Have you seen credits or refunds on your merchant statements that do not make sense? What other questions do you have related to the potential issues of accepting credits cards as a form of customer payment?
On July 1st, the IRS released an abridged form to obtain tax exempt under Section 501(c) (3) of the Internal Revenue Code. If an organization has less than $50,000 in gross receipts and less than $250,000 in assets, these organizations may be eligible to file Form 1023-EZ when applying for tax exempt status. The Form 1023-EZ form takes the voluminous Form 1023 and cuts it down to a mere 3 pages. But before everyone gets too excited, the IRS has a 7-page Eligibility Checklist that must be completed to see if you qualify to use the Form 1023-EZ. Here is a sample of some of the questions:
Do you project that your annual gross receipts will exceed $50,000 in any of the next 3 years?
Have your annual gross receipts exceeded $50,000 in any of the past 3 years?
Do you have total assets in excess of $250,000?
Were you formed under the laws of a foreign country?
If an organization can answer “NO” to all of the above, they could be one step closer to filing their Form 1023-EZ, but there are other additional eligibility requirements to qualify. We possesses the professional skills necessary to provide the valuable services and guidance for completing the Form 1023-EZ or the Form 1023 if an organization doesn’t qualify for the short form. Give us a call at (717) 569-2900 or visit our Nonprofit Practice Group website to reach out to someone about taking the next steps toward obtaining tax exempt status.
A surety bond is a type of guarantee in which the surety upholds a construction contractor’s promise to an owner that a project will be completed and bills will be paid. As the surety is extending this guarantee, the contractor’s character and creditworthiness are most important. CPA prepared financial statements, including a balance sheet that can support capital and reflect solid performance, is also vital. A surety will evaluate and adjust each line of the balance sheet in order to determine financial strength and to calculate bonding limits. Liquidity and net worth are key measures. Here are a few tips in preparing your balance sheet to maximize bonding potential:
Cash – high cash balance at year end will increase liquidity and a balance sufficient for operations throughout the year will show good cash management. Increase collection efforts close to year end and deposit payments by the end of the year. Likewise, do not pre-pay or early pay any vendors in order to preserve cash.
Accounts and Retentions Receivable – amounts over 90 days will not be counted in full, if at all, as current assets. Clean up the accounts receivable aging by writing off any accounts deemed uncollectible and make efforts to keep balances current.
Costs in Excess of Billings (Underbillings) – since this represents work completed but not yet billed, it should be minimized. Large underbillings can be a red flag to the bonding company as they could mean unrecognized losses. Bill as much as possible by year end, if the contract terms allow.
Fixed Assets – net book value of property and equipment will be included as a noncurrent asset and non-operating assets such as leasehold improvements will be discounted or taken out altogether. Evaluate and set depreciable lives and salvage values based on actual experience to ensure assets are not being depreciated too quickly. Match the purchase of new assets with long-term debt and do not use an operating line of credit.
Billings in Excess of Costs (Overbillings) – should be reasonable and balanced in relation to open work. Overbillings should also be reflected as cash in hand, otherwise it could indicate amounts received for one job but spent on another job, demonstrating poor job cash management. An industry benchmark is a net overbilled position equal to 2% of sales.
Liabilities – proper current and long term classifications are important as this affects current ratio and working capital. Make sure any debt covenants have been met or waived, otherwise the debt is callable and therefore considered current in its entirety.
I would encourage contractors to work together with their CPA and the bonding agent, as a CPA can assist in clarifying any concerns the bonding company may have. An experienced CPA specializing in construction accounting can also add credibility. We currently has a team of seventeen individuals dedicated to our Construction Industry practice group, including two Certified Construction Industry Financial Professionals …how can we put our expertise to work for you?
Many franchised new vehicle dealerships are having the same reaction when they discuss with us the Facility Image Upgrade Program payments they receive from their manufacturers to make improvements to their showrooms. These payments can be for new signage, modernization of the showroom or complete expansion or relocation. Conventional wisdom would say that the payments the dealerships are receiving for this would just offset the cost – if it is for a capital improvement such as a remodeled building, then the payments would just reduce the cost basis (and thus the future depreciation expense) on that improvement. But the IRS and conventional wisdom do not always agree.
This topic has been debated by the IRS and auto dealerships for years. In 1971 the tax court heard the John B. White, Inc. case where White, an auto dealer, was paid by a manufacturer to relocate his dealership to a more desirable location. In that case (which the IRS won), even though the payments were to defray the dealership’s cost of improvements, the tax court ruled that the dealership still owned the property improvements so the payments were income to the dealership. Over the years dealerships have argued that the facts in White did not really match theirs, so the payments were not taxable. However, the IRS finally put an end to the debate in April 2014 when the Associate Chief Counsel of the IRS issued memorandum AM2014-04. To summarize the memorandum, the IRS decided that these payments are gross income under Internal Revenue Code (IRC) Section 61 and that they do not:
reduce the basis of dealership property under IRC Section 362
nor are they purchase price adjustments to individual vehicles purchased from the manufacturer (another way these payments had been accounted for in the past),
nor are they nonshareholder contributions to capital under IRC Section 118.
The IRS also stated that it does not matter if it is possible part of the payments may be returned to the manufacturer in the future if the dealership does not meet some image standard or sales quota – the payments are taxable when received for a cash basis taxpayer or available to be received for an accrual basis taxpayer. Of course, if the payments are an actual documented loan to the dealership, then the payments are a liability, not revenue.
So what can a dealership do? The payments are taxable income right away, but the improvements are depreciated over 5, 15 or even 39 years! One thing that can be done is to make sure you understand the nature of the improvements. Simply cosmetic changes to the building can be expensed in the same year the payments are taxable, so they would offset each other (but, be careful of the new IRS Regulations as we detailed in our January 13, 2015 entry!) Also, certain improvements can be depreciated over shorter periods than normal commercial real estate, so the deduction for the improvements could be received soon after the payment is taxed.
So don’t be surprised. Even though the IRS has made a stance on this, through proper tax planning we can make sure you don’t experience sticker shock on your next tax bill. Reach out to our Automobile Dealership practice group to find out how!
A common issue facing plan administrators of defined contribution plans relates to asset balances in their plans of terminated employees. Often times, these balances can sit there for years, generating interest/investment income for the participant, as well as additional administrative expenses for the plan. In the case of smaller defined contribution plans (i.e. plans that average around 100 participants), employees that don’t rollover their balances to another plan or request a distribution upon termination could potentially continue to trigger an audit requirement for the plan in question. In these types of situations, it would be beneficial for plan administrator to take various measures to remove the assets from their plan. Sometimes it is easy as sending an email or letter, reminding the participant that they have left funds in the plan and provide them the paperwork to transfer the funds, if they desire. However, what is the fiduciary responsibility of a plan administrator to locate missing or unresponsive participants prior to discharging their obligations to these participants?
In August 2014, the DOL issued Field Assistance Bulletin No. 2014-01 (FAB No. 2014-01) “Fiduciary Duties and Missing Participants in Terminated Defined Contribution Plans”. Although geared toward terminated plans, this bulletin provides relevant guidance to all plan administrators, as it details various options to be utilized by plan administrators in locating participants, as well as appropriate methods to distribute the assets if location attempts are unsuccessful. Previously, plan administrators could utilize the IRS and Social Security Administration letter-forwarding services. However, both of these options have been terminated. FAB No. 2014-01 recommends the following search methods:
Send email/first class mail to last known participant address;
Send notification via certified mail;
Check related plan and employer records;
Contact designated plan beneficiary;
Use of free electronic search tools.
When trying to locate a missing plan participant, the dollar amount of the participant account balance is NOT a factor – an effort to contact all participants is required. If the methods above are unsuccessful, a plan administrator needs to consider the size of the participant’s plan balance and the cost of additional search methods. For larger balances, commercial locator services, credit reporting agencies and/or investigation databases are additional, fee-based options.
Despite the efforts taken by a plan administrator, there will be situations in which location attempts of missing or unresponsive participants will be unsuccessful. The plan administrator can then consider distributing these balances into individual retirement plans, such as an annuity, as noted in Section 404(a) of ERISA. If plan administrator cannot find a retirement plan provider to accept these rollover distributions for missing or unresponsive participants or chooses not to elect this option due to a specific reason (i.e. immaterial size of participant balance), he or she can chose from the following two options:
Opening an interest bearing federally insured bank account;
Transferring balance to a state unclaimed property fund (however, the plan administrator must consider any state law requirements prior to selecting this option).
In summary, it is the plan administrator’s fiduciary responsibility to take reasonable steps to locate missing or unresponsive participants prior to distributing these assets from the plan. If these search methods are unsuccessful, the plan administrator needs to consider various factors (i.e. size of participant balance, etc.) prior to utilizing recommended distribution methods. No matter how a plan administrator ultimately decides to handle plan balances related to missing or unresponsive participants, he or she should maintain documentation of steps taken throughout the search process and ultimate resolution on if/how the related assets are distributed.
If you have any questions or would like more information, contact our Employee Benefit Plan practice group today!
For those entities involved with Federal funding, the term “Single Audit” is often found in grant contracts. But not everyone is clear about what it means. This topic is also being brought up at seminars and in newsletters as there are many items about to change in the coming months.
Let’s start with the history (before December 26, 2014):
1. What it is:
An entity-wide audit consisting of two main parts:
an audit of the financial statements
a compliance audit of the entity’s major federal award programs. Auditors are required to gain an understanding and test internal controls over compliance as well as test compliance with applicable compliance requirements for each major program.
A single audit will be conducted annually
Audit period will be the entity’s fiscal year
Type A programs are defined as programs with expenditures > $300,000 (if total federal expenditures are < $10 million)
Percentage of coverage rules are 50% and 25% of total federal expenditures based on entity’s status as not low-risk and low-risk auditee, respectively
2. Who is subject:
State and local governments
Each of these entities must spend greater than $500,000 in federal awards in a fiscal year
3. Reports included in a Single Audit:
Schedule of Expenditures of Federal Awards (SEFA)
Report on controls and compliance of entity
Report on controls and compliance of major federal programs
Schedule of Findings and Questioned Costs (known and likely questioned costs in excess of $10,000)
Summary Schedule of Prior Audit Findings
What Changed on December 26, 2014?
1. What it Is:
New Single Audit threshold is if the entity expends more than $750,000 in federal awards in a fiscal year.
Type A Programs have new thresholds ($750,000 if <$10 million in federal expenditures)
Percentage of coverage rules are now 40% and 20% for not low-risk and low-risk auditees, respectively
2. Reports included in a Single Audit:
Questioned costs are now defined as known and likely questioned costs in excess of $25,000
3. Other Changes:
Eight previously separate sets of Office of Management and Budget (OMB) guidance have been combined into one.
In guidance, watch “should” which indicates best practices or recommended approaches versus “must” which indicates requirements.
For a period of time, an entity may have awards under both old and new guidance and will need to pay attention to which rules apply.
Internal controls are tools that a business can put in place to help prevent errors or fraud in accounting information. More specifically, controls are policies and procedures that improve the accuracy of financial information.
How can they help my business?
An effective system of internal controls will likely lead to increased accuracy of financial information which will give owners and management better decision-making ability. They can also help provide peace of mind that your business is operating as it should with a decreased probability for accidental errors or intentional misstatements.
Should small companies have internal controls?
Yes – all companies should have internal controls as they are important regardless of size. In fact, controls may be more important for a small business because one accounting error or misstatement may have a greater impact than in a large business, and because a smaller staff can make smaller companies more susceptible to errors and fraud.
Can controls be implemented at a reasonable cost?
Yes – the simplest controls are easy steps that can be done without a significant investment of time or money. See the list further down the page for some common, but effective controls all businesses should have in place.
What can effective controls accomplish?
Effective controls can lead to more accurate information. They also decrease the likelihood of significant errors, misstatements, and even intentional malicious acts by employees.
Simple Steps Business Owners Can Take to Improve Internal Control
Don’t share passwords and change passwords regularly.
Reconcile information: all bank accounts and credit cards should be reconciled on a regular basis. If you want to take the next step, have someone in management or an owner review the reconciliation.
Segregate duties: split up steps in the cash receipts and payments processes among different employees. It only takes two people to have a simple segregation of duties. For example, if someone approves invoices, have someone else sign the check.
Have owner(s) be present and actively involved. You do not need to micromanage, but just being aware of the processes in your business will go a long way towards better financial reporting and deterring intentional misstatements.
Take an internal control survey to evaluate the current status of your control environment. If interested in such a survey, please contact TEG and we can provide a copy of such a survey.
Ways We Can Help
Assist in establishing controls.
If your business lacks internal controls, you can see from the above questions and answers how important they can be for businesses of all sizes. If you are not sure where to start or would like professional advice, TEG can assist in establishing internal controls that will fit your business.
Review existing controls.
If you have internal controls in place, your business has already taken positive steps and established a control environment. There is always room for improvement and TEG can assist in reviewing and testing controls in place and make suggestions to change or enhance those controls.
Provide support if controls are circumvented and result in error, misstatement, or theft.
Hopefully, as a business owner or manager, you never have to deal with a breakdown in the internal control environment that leads to negative consequences. If you are in a situation and need to know where things went wrong or how much was misreported, TEG can help. Our forensic team will not only help uncover the error or theft, but also work with you to improve your system to help prevent future problems.
Do you know of a local church that could put an extra $5,000 – $40,000 to good use? In my experience, the answer to this question is always “yes”. You will be surprised to learn that the majority of churches have no knowledge of their opportunity to receive significant tax refunds, hence effectively leaving money on the table.
By law, churches are exempt from an annual IRS Form 990 filing which other nonprofits are required to complete. As a result, a church generally may not need to interact with an accountant. However, if a church did have a good accountant, they would certainly encourage the leadership to file for the Small Business Health Care Tax Credit.
The Health Care Tax Credit was signed into law as part of the Affordable Care Act of 2010 and offers relief to small employers providing health insurance to their workers. The purpose of the credit was to encourage small employers to continue offering coverage to employees instead of sending them to the insurance exchange marketplace. Under the law, qualifying churches are able to receive a refund up to 25% of health insurance premiums paid. Churches which I have assisted have received as much as a $16,500 refund for a single filing and total refunds for all churches have exceeded $300,000 in less than a year.
The secret to the significant benefit of the Health Care Tax Credit to churches rests in the tax status of ministers. When most small employers attempt to take the tax credit, they find their refund becomes severely limited by their average annual wages. This refund limitation kicks in once average annual wages exceed $25,000 and the refund is completely phased out once average annual wages reach $50,000. While the tax credit rules do reduce refunds for many small employers, the tax status of a church minister generally creates a larger than usual refund. Because a minister’s wages are not subject to FICA tax, the minister’s wages are excluded when calculating average annual wages. With lower average annual wages, a church’s refund tends to be maximized to the full 25% tax credit.
Churches also benefit under the Health Care Tax Credit by the ability to file only to receive a refund under a specific IRS provision on Form 990-T. This allows the church to skip the standard 990 filing disclosures and financial information. Instead, the filing process is simplified to include only the information required to claim the Health Care Tax Credit.
By speaking with a number of churches, I have found that the most widespread misconception about the tax credit is that “we must have missed our chance for the refund by now”. Instead, churches should be aware that the IRS statute of limitations to file for a refund is three years from the original tax return due date. This means churches can currently file and receive refunds for 2011, 2012, and 2013 tax years. I would recommend that a church take advantage of filing for multiple years now before the tax credit rules become more stringent for 2014 and beyond.
Interested in knowing of how much refund your church can claim? Contact your tax advisor at Trout, Ebersole & Groff LLP for a risk-free analysis. Authored by Dan Chodan, CPA, a member of the Tax-Exempt Organizations practice group. Dan specializes in the Small Business Health Care Tax Credit and other tax issues related to the Affordable Care Act.
Often we receive inquiries from clients regarding how much they may give to children or grandchildren without having to pay U.S. gift tax. (Answer: as of 2015 you have a lifetime exemption of $5.43 million which may be transferred without federal estate or gift tax consequences; an additional $14,000 per recipient per year is excluded from taxable transfers.)
Generally, when this question is asked, people are thinking of cash gifts or perhaps gifts of stocks and securities. However, there are many other transactions that may be considered gifts. The key to understanding what may constitute a gift is determining if an item of value was transferred without adequate and full consideration.
Contributing to 529 plans. Such plans are an excellent tool for preparing for the expenses of higher education. However, parents, grandparents or others who make contributions to a 529 plan are gifting funds to the beneficiary of the plan.
Paying for the living expenses of an individual you do not have a legal obligation to support. In addition to non-related parties, this also could apply to adult children. If you are paying for the room and board for a child you are no longer obligated to support, this may be a gift.
Adding someone’s name to a title of an asset, such as a real estate deed. If you add your child’s name to the deed of your home, you have gifted a portion of the value of your property to your child.
Giving shares of ownership of a family-held business. In succession planning for many closely-held businesses, often shares of ownership are given to children or grandchildren in order to maintain continuity in the business. These shares may constitute a gift.
Forgiving a note or paying off a note on behalf of someone. If you forgave a note you held and the borrower did not report it as income on their income taxes, your forgiveness is a gift to the borrower. Similarly, if you have paid off a debt on behalf of someone else, you have made a gift to the borrower even though funds were not given directly to them.
Taking adult children on vacation. Anytime you give an item of value, whether it is a sweater, a new car or a family vacation, you have given a gift.
All of us give gifts every year that have no tax consequence because of the annual $14,000 per recipient exclusion. For example, if you take your son’s family of four on an extensive Mediterranean cruise, expenses for his family would have to exceed $56,000 for there to be a gift tax consequence for that one gift. However, it is important to remember that the $14,000 exclusion is cumulative of all gifts provided in a year. So, if in one year you bought your adult daughter a car, made a contribution to her 529 plan and gave her a cash gift for Christmas, which when added together exceed $14,000, you may have to file a gift tax return.
There are many financial planning opportunities that enable the structuring of gifting transactions to eliminate or reduce the impact of federal estate and gift tax consequences. Contact us if you are planning on engaging in transactions which may have gift tax implications.