Download - Tax tip newsline 2017-08
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TAX TIPS NEWSLINE Proudly Published in the USA
AUGUST 2017
Produced monthly for Clients & Friends of the Advisory Group Associates.
Our Mission. Sharing Solutions that deliver real value.
This “TAX TIPS NEWSLINE” is compiled by the founder of the Tax & Advisory firms, Frank
L. Zerjav, CPA and team of Professional Tax Associates, and then it is sent by email each month
because all taxpayers need tax and compliance knowledge. It’s a big part of your life and the
entities that you operate.
The CPA firm engages in proactive Strategic Tax Planning for family-owned or privately-held
businesses and their owners, professionals, investors and individuals. Our clients minimize their
tax burden by appropriate proven strategies, which help them to keep more of what they earn.
Advisory Group’s Tax Resolution Experts also engage in resolving tax problems with either
Federal or State tax agencies for clients who need these specialized, proven solutions and
options. Our devoted team of Professional Tax Advisors and Tax Resolution Experts do
care; their primary objective is the well-being of clients, their family and their survivors, as
well as their satisfaction with the work we do, while our goal is to be the premier choice of
Tax & Advisory firms, not the biggest firm by sharing solutions that deliver real value.
SUMMER HOURS: The office will close at 12pm on Fridays during June, July and August
Inside this Month’s Issue
Contact Us
Tax-Free Fringe Benefits You Have to Like
Starting a Business: Partnerships
Due Diligence is Critical When Buying a Business
Employee Business Expenses
Pension Planning – Young Business Owners
Educational Savings Plans
Home and Domestic Service Workers
Avoid Penalties Misclassifying Workers as Contractors
Tax Audit Tips: Travel & Entertainment
IRS Outsourcing Tax Debt to Private Collectors
Social Security Earnings Limit
Family Owned Businesses: Strategic Planning
Tax Reform as Biggest Challenge
Domestic & Foreign Child Adoptions: Tax Consequences
Wide Range of Services Offered
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Contact Us - There are many events that occur during the year that can affect your tax situation.
Preparation of your tax return involves summarizing transactions and events that occurred during
the prior year. In most situations, treatment is firmly established at the time the transaction
occurs. However, negative tax effects can be avoided by proper planning. Please contact us in
advance if you have questions about the tax effects of a transaction or event, including the
following:
• Pension or IRA distributions. • Sale or purchase of a residence or • Self-employment.
• Significant change in income or deductions. other real estate. • Charitable contributions of
• Job change. • Retirement. property in excess of $5,000.
• Marriage. • Notice from IRS or other revenue • Gifts (over $14,000 to an
• Attainment of age 59½ or 70½. department. individual).
• Sale or purchase of a business. • Divorce or separation. • Starting new business.
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TAX-FREE FRINGE BENEFITS YOU HAVE TO LIKE
It’s about as good as it gets when you see the words “tax-free” in the tax law.
Under the de minimis fringe benefit rules, your business deducts the cost of giving you or your
employees flowers, fruit, books, and similar property under special circumstances. The
recipients—you or your employees—receive these fringe benefits tax-free.
You can’t do this too often or spend too much money. But it’s easy to see that this is a great
benefit, especially when you give to yourself.
For your business to make this fringe benefit tax-free, it must meet two requirements—value and
frequency. Here, the IRS has not been very helpful in defining either criterion. With some
research, we arrived at $70 as the maximum value for the flowers, fruit, books, and similar
property.
How often is too often?
The IRS doesn’t say, but adds some common sense to the regulation with this guidance as to
when this fringe benefit is appropriate: “Examples of de minimis fringe benefits are ... flowers,
fruit, books, or similar property provided to employees under special circumstances (e.g., on
account of illness, outstanding performance, or family crisis).”
Don’t use gift cards or certificates. The IRS considers the coupon or gift card taxable to the
recipient no matter how small the amount, and even if that small amount is used solely to buy the
flowers or fruit.
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STARTING A BUSINESS: PARTNERSHIPS
Unlike a C- Corporation, a Partnership is not a taxable entity. Rather, each partner is taxed
directly on his or her share of Partnership profits or losses. This is an advantage over operating as
a C- Corporation where profits could be taxed twice, once at the corporate level and again at the
owner level when dividends are distributed to shareholders. However, IR Code Section 1202
offers an incentive to purchase qualified small business stock (QSBS) which if held for more
than five years will be 100% tax-free gain upon redemption or sale of originally issued stock.
A new business often has losses in the early years. By operating as a Partnership, you can use
your share of the Partnership’s losses to offset income from other sources, such as investments
and compensation from employment. However, to be able to deduct losses currently, you must
satisfy the so-called passive activity loss (PAL) rules. As a general rule, as long as you materially
participate in the business conducted by the Partnership, you will meet the PAL rules.
A partner is not considered an employee of the Partnership. Instead, in addition to income taxes,
partners also pay self-employment tax on the Partnership income (double taxes). One component
of self-employment tax is the Social Security portion, which is computed on earnings up to
$118,500 for 2016 ($127,200 for 2017), and the Medicare portion, which has no upper limit.
Another important legal downside of operating as a Partnership is that partners are exposed to
unlimited liability from lawsuits that arise in connection with the business even when they are
based on the acts or omissions of a partner. This is to be contrasted with operating a business as a
corporation where, as a general rule, only the corporation’s funds are at risk not the owner (s)’.
Fortunately, you do not have to forgo the tax advantages of operating as a flow through entity as
a Partnership to limit your potential liability. You can operate as an S- Corporation to minimize
your liability exposure (while improving the owner’s asset protection) and yet be taxed similarly
(but not identically) to the way you would be taxed if you operated as a Partnership since self-
employment taxes are not paid on flow through income or dividend distributions. A reasonable
salary needs to be paid to each shareholder-employee.
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DUE DILIGENCE IS CRITICAL WHEN BUYING A BUSINESS
If you are considering or in process of buying an existing business since you believe that the
existing business represents less of a risk than starting a new business from scratch, - due
diligence is critical.
Here are just a few examples of how due diligence works in your favor:
• If you are buying the assets of the target business, make the target comply with the
applicable bulk sales law so that creditors cannot “follow the assets” to the new owner
(you) and make claims against you.
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• To avoid being surprised by security interests and liens perfected under the Uniform
Commercial Code (UCC), conduct a UCC filing search.
• Inspect local court records to identify undisclosed liens or judgments against the target
business or the existence of current or past litigation against the business, its owner(s), or
its officers.
• Review the target business entity’s income, payroll, property, sales, use, and excise tax
returns for several years to identify exposure to underpaid taxes.
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EMPLOYEE BUSINESS EXPENSES
Now may be a good time to evaluate the expenses you incur as an employee in connection with
your work. While your employer may be reimbursing you for some of these expenses, there may
be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper
substantiation, it is possible that you may be able to obtain greater reimbursement from your
employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized
deductions.
In order to be reimbursed and/or deducted, trade or business expenses must be ordinary,
necessary, and reasonable. They also must be properly substantiated. Examples of qualifying
expenses include:
Travel, transportation, meal, or entertainment expenses
Safety equipment, small tools, or supplies
Uniforms required by your employer that are not suitable for everyday wear
Required protective clothing
Dues to professional organizations
Subscriptions to professional journals
Cell or Smart Phones
Certain expenses for the business use of your home
Computer costs
Work-related educational expenses
You may also benefit from a review of the business expenses related to the use of your home. If
you qualify for the home office deduction, you may be able to deduct part of your home’s normal
operating expenses, such as utilities and insurance, etc. The tax-savings opportunities available
to you are dependent not only on the type of work you do at home, but where in your home you
perform it.
The rules for deducting these expenses, as well as substantiating your deduction, vary
according to the type of expense involved. It is important to retain all records and receipts
that document the time, place, and business purpose of each expense. Please contact one of
our Professional Tax Advisors to discuss your particular situation and the potential
tax-free reimbursements from your employer.
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PENSION PLANNING - YOUNG BUSINESS OWNERS
Various types of qualified retirement plans are available, however at an young age, a so-called
defined contribution plan probably would work best. It should enable you to build up the largest
retirement fund possible.
Different kinds of limits apply to the various kinds of qualified retirement plans. With a defined
contribution plan, the main limit is to the amount that can be contributed and deducted to each
participant’s account for any given year. Generally, the limit is the lesser of 100 percent of
compensation or $54,000 as indexed for inflation for the 2017 tax year. The amount of
compensation that can generally be taken into account when making these calculations is
$270,000 (as indexed for inflation for 2017).
While contributions are limited, there is no limit to the amount of benefits you can ultimately
collect from the plan. Your contributions are invested, and grow tax-deferred until withdrawn.
You can continue to make deductible contributions as long as you continue working, no matter
how large your account grows.
With a defined benefit plan, which is more like a traditional pension plan, there are limits to the
amount of benefit you can ultimately receive (which is reduced if you decide to retire early). And
deductible contributions that can be made for younger participants are smaller than are possible
with a defined contribution plan.
Something else that you will probably like about the defined contribution plan is that it is easier
and less costly to administer. A defined benefit plan needs periodic valuations and actuarial
computations.
If you set up a defined contribution plan and have employees, it also must cover those employees
of your business. However, new and younger employees will not necessarily have to receive
contributions. Your plan also can be integrated with social security benefits so that a greater
percentage of plan contributions go to employees above the wage base.
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EDUCATIONAL SAVINGS PLANS
As a parent with young children, you are faced with many rewards and challenges. One of which
may be saving for the high cost of a college education. However, there are two tax-favored
options that might be beneficial: a qualified tuition program and a Coverdell education savings
account. In addition, you might also want to invest in U.S. savings bonds that allow you to
exclude the interest income in the year you pay the higher education expenses. Each of these
options has their benefits and limitations, but the sooner you choose to make the investment in
your child’s future, the greater the tax savings.
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Qualified Tuition Program (QTP). A qualified tuition program (also known as a 529 plan for
the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan
is a program established and maintained by a state that allows taxpayers to either prepay or
contribute to an account for paying a student’s qualified higher education expenses. Similarly,
private plans, provided by colleges and groups of colleges allow taxpayers to prepay a student’s
qualified education expenses. These 529 plans have, in recent years, become a popular way for
parents and other family members to save for a child’s college education. Though contributions
to 529 plans are not deductible, there is also no income limit for contributors.
529 plan distributions are tax-free as long as they are used to pay qualified higher education
expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books
and supplies. For someone who is at least a half-time student, room and board also qualifies as
higher education expense.
Coverdell education savings accounts (ESA). Coverdell education savings are custodial
accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses,
as well as higher education expense. The maximum annual Coverdell ESA contribution is
limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions
are subject to an excise tax.
Entities such as corporations, partnerships, and trusts, as well as individuals can contribute to one
or several ESAs. However, contributions by individual taxpayers are subject to phase-out
depending on their adjusted gross income. The annual contribution starts to phase out for married
couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or
above $95,000 and less than $110,000 for single individuals.
Contributions are not deductible by the donor and distributions are not included in the
beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings
accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except
for individuals with special needs. Parents can maximize benefits, however, by transferring the
older siblings’ account balance to a younger brother, sister or first cousin, thereby extending the
tax-free growth period.
U.S. Savings Bonds. If you redeem qualified U.S. savings bonds and pay higher education
expenses during the same tax year, you may be able to exclude some of the interest from income.
Qualified bonds are EE savings bonds issued after 1989, and Series I bonds (first available in
1998). The tax advantages are minimized unless the redemption of the bonds is delayed a
number of years, therefore some planning is required.
The exclusion is available only for an individual who is at least 24 years of age before the issue
date of the bond, and is the sole owner, or joint owner with a spouse. Therefore, bonds purchased
by children or bonds purchased by parents and later transferred to their children, are not eligible
for the exclusion. However, bonds purchased by a parent and later used by the parent to pay a
dependent child’s expenses are eligible. The exclusion is, however, phased out and eventually
eliminated for high-income taxpayers.
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Of course, in planning for higher-education costs, parents may also choose to use funds from an
individual retirement account or a traditional form of savings. In addition, higher education costs
may be supplemented with scholarships, loans and grants. However, having a viable plan as
early as possible in a child’s life will make maximum use of a family’s financial resources and
may provide some tax benefit.
If you would like to explore how these opportunities can work for you and have one of our
Professional Tax Advisors evaluate your situation and discuss options, please do not hesitate to
contact us.
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HOME AND DOMESTIC SERVICE WORKERS
Your family may need outside assistance to provide care and supervision for your children or
elderly parents while you work. You may hire cleaning help or a landscaper to assist with the
upkeep of your home, or someone to walk your dog during the work week. These lifestyle
choices simplify your daily routine, but there are rules you must follow when compensating your
domestic workers. We can help you determine what your responsibilities are with respect to your
workers, and ensure that you comply with the payment and reporting rules that apply to your
situation.
For instance, understanding the difference between an employee and an independent contractor
is very important. If you are an employer, you are required to withhold and contribute a matching
amount of FICA and Medicare taxes from your domestic worker’s income. However, if your
workers are independent contractors, you are only required to report payments of $600 or more
on a Form 1099-MISC, Miscellaneous Income. Failing to make the right classification could cost
you money.
Alternatively, if you incur qualified expenses on behalf of a child under age 13, or a disabled
spouse or dependent, you may be able to claim a child and dependent care tax credit. The credit
that can be claimed ranges from 20 to 35 percent of qualified employment-related expenses, but
is subject to a cap which is calculated as a percentage of these expenses. The maximum amount
of eligible expenses is $3,000 if you have one qualifying dependent and $6,000 if you have two
or more qualifying dependents.
FOR PERSONS WHO RECEIVE DOMESTIC SERVICES PAY
You may be considered a domestic services worker if you perform household duties as part of
your daily work routine. Generally, services performed by cooks, waiters, babysitters, butlers,
housekeepers, maids, valets, caretakers, chauffeurs, and companions are considered domestic
services.
However, you may be performing these services as an employee rather than an independent
contractor, and this distinction could be very important in determining how to report your
income, and pay your employment and income taxes. Generally, the right to control how duties
are executed and what tasks are performed is sufficient to make a worker an employee.
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For example, if you are a babysitter in the parents’ home, you are probably a domestic employee.
If you earn $2,000 or more in 2017, your employer is required to withhold FICA and Medicare
taxes from your income, and you must contribute an equal amount of FICA and Medicare taxes.
Subject to certain limitations, your employer may also be required to pay federal unemployment
tax (FUTA), but is not obliged to withhold income taxes unless there is a mutual agreement to do
so. However, you are liable for federal and state income tax on your earnings, and may be
required to make quarterly estimated tax payments.
Conversely, if you watch children in your own home, you are most likely an independent
contractor. Your clients must report your remuneration of $600 or more on a Form 1099-MISC,
Miscellaneous Income. Your income is subject to self-employment and income tax, and along
with any related business connected expenses, should be reported on Form 1040, Schedule C.
However, since your business expenses are not reported on Form 1040, Schedule A, they are not
limited to the 2% of adjusted gross income (AGI) threshold.
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AVOID PENALTIES MISCLASSIFYING WORKERS AS
CONTRACTORS
As you know, one potential business tax reduction strategy is to hire independent contractors
instead of employees. If a worker’s classification fits within the tax law, it’s a legitimate strategy
that can save you thousands of dollars.
Sometimes the classification isn’t clear-cut. You may think you have the independent
contractor classification correct, but when the IRS does the audit, you learn that those contractors
are W-2 employees. This can cost you a huge sum of money in back payroll taxes.
This happened to the Mescalero Apache Tribe: the IRS hit it with a large payroll tax bill when it
reclassified many of the tribe’s independent contractors as employees. The tribe did us a big
favor by making some new law and also highlighted some things that I wanted to share with you
about classifying workers as independent contractors.
The law requires that you withhold taxes on the wages that you pay to your employees. If you
don’t, you are liable for the withholding and FICA (i.e., Social Security and Medicare) taxes that
you neglected to remit to the IRS.
Thus, if the IRS reclassifies your independent contractors as W-2 employees, you are on the
hook for the taxes you should have taken from the paychecks, employer’s portion of FICA taxes
plus penalties.
However, you have a way out of a big chunk of this potential tax bill: if you can show the worker
paid the taxes, then you aren’t liable for them. This rule prevents the taxes from being
double-paid. For this favorable treatment, which is on a worker-by-worker basis, you need the
worker to sign IRS Form 4669, Statement of Payments Received.
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Of course, your first step should be to make sure that you classify your workers correctly using
the law as your guide. If you use independent contractors, one important “Safe Harbor” is to be
certain that Forms 1099-MISC are issued annually to independent contractors from the
information they submitted on Form W-9, Request for Taxpayer Identification Number (TIN).
You don’t want an IRS employee classification audit and the headaches that come with it.
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TAX AUDIT TIPS: TRAVEL & ENTERTAINMENT
How would your tax records hold up in an IRS audit?
What? You don’t have much in the way of records, but you think you could get them in shape
before the IRS gets to you? Think again. This is highly unlikely to work, for three reasons:
1. You have violated the timely records rule, and the IRS is likely to figure this out.
2. You likely don’t have the receipts required.
3. You likely don’t know what you are supposed to document.
Think of the wasted time you would spend creating records that may well give you nothing for
the effort. That’s what happened to Nathan E. Lang.
• Lang claimed $16,327 as employee expenses. The IRS audited Lang’s tax return. How
much did the IRS allow in employee-expense deductions? Answer: zero.
• Lang claimed $17,875 in proprietor expenses on Schedule C. How much did the IRS
allow in Schedule C deductions? Answer: zero.
You might ask: how could the IRS disallow everything? Answer: Lang dug his own grave with
bad records. Lang took his case to court. The Tax Court explained the rules that apply to Lang’s
deductions as follows:
The IRS is presumed correct in denying all of Lang’s deductions.
Lang has the burden of overcoming this presumption and proving that the IRS is
wrong.
Under Cohan, the court may estimate certain deductible expenses if Lang provides
sufficient evidence for estimates; however, in deciding the deductible amounts, the
court must bear heavily against Lang, as such inexactitudes are of his own making.
The court may not apply Cohan estimates to travel; meals and entertainment; or
listed property, such as a passenger vehicle. The court must disallow these deductions
in full if they fail the strict substantiation requirements of Section 274(d) as to
amount; time and place; business purpose; and, in the case of meals and
entertainment, business relationship.
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You are probably like most businesspeople: you don’t get up in the morning excited about
keeping your tax records. It’s also likely that you don’t get happy about reconciling your
checkbooks or putting ink or toner in your printers, just as the farmers you know don’t get
excited about cleaning out their barns.
But if you want to be in business and not suffer when the IRS audits your tax returns, you need
to keep tax records. This takes a little time and requires some knowledge. TAKE THE ACTION
NEEDED: create the tax records that you need to avoid trouble, especially the type of trouble
that Lang suffered.
Contact one of our Professional Tax Advisors to discuss any questions or concerns regarding
your particular situation.
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IRS OUTSOURCING TAX DEBT TO PRIVATE DEBT
COLLECTORS
You may have someone you know who mentioned that they have some old tax debts that the IRS
has not tried to collect for some time.
That was probably true once but not any longer, since private collection of tax debts is back.
As part of the Fixing America’s Surface Transportation (FAST) Act, lawmakers wrote a
provision that requires the IRS to outsource inactive tax receivables to private collection
agencies.
About nine months ago, the IRS announced it had contracted with four private collection
agencies to operate the program:
• CBE Group in Cedar Falls, Iowa
• Conserve in Fairport, N.Y.
• Performant in Livermore, Calif.
• Pioneer in Horseheads, N.Y.
And then a little over two months ago, the IRS released new Internal Revenue Manual sections
putting in place the procedures for this new program.
This means that your friends could now receive a Notice CP4O telling them that the IRS
assigned their case to a private collection agency.
If that happens to them and you think they are good people whom our Professional Tax
Resolution Experts have the knowledge and experience to help, please have them contact us and
say you referred them.
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SOCIAL SECURITY EARNINGS LIMIT
A large number of retired individuals are back into the workforce. In addition to earning a salary,
these individuals may also be receiving Social Security benefits. Depending on the individual’s
age, benefits may be reduced and included in the recipient’s gross income.
Taxpayers at and above full retirement age can continue to earn unlimited amounts without any
reduction in Social Security benefits. Full-retirement age was 65 for many years. However,
beginning with 1938 birthdates or later, that age gradually increases.
If you were born January 2, 1943, through January 1, 1955, then your full retirement age for
retirement insurance benefits is 66. If you work and are full retirement age or older, you may
keep all of your benefits, no matter how much you earn. If you are younger than full retirement
age, there is a limit to how much you can earn and still receive full Social Security benefits. If
you are younger than full retirement age during all of 2017, $1 will be deducted from your
benefits for each $2 you earn above $16,920.
If you reach full retirement age during 2017, $1 will be deducted from your benefits for each
$3 you earn above $44,880 until the month you reach full retirement age.
A portion of Social Security benefits is included in the gross income of a recipient whose total
income exceeds applicable base and adjusted base amounts. The base amounts and adjusted base
amounts vary with the filing status of the recipient.
Since income tax is not required to be withheld on Social Security, you may need to pay
estimated tax. One of our Professional Tax Advisors can help you determine if you should pay
estimated tax. Additionally, even though Social Security benefit payments are not automatically
subject to withholding, a taxpayer may request to have federal income tax withheld from them.
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FAMILY OWNED BUSINESSES: STRATEGIC PLANNING
Strategy and succession are critical for survival of a family-owned business and as their trusted
advisor, CPAs play a key role.
CPAs advising family-owned business owners have opportunities to nudge leadership toward
planning for strategy and succession that can address shortcomings and lead to a more
successful, sustainable business.
A strategic business planning process for a family-owned business should include a careful
discussion and evaluation of:
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• The changing landscape of the current business environment.
• Changes in consumer habits and needs.
• The products and services that they currently offer.
• Capabilities they possess that may be underutilized.
Family-owned businesses tend to get tunnel vision about their products and services and may not
take time to step back and evaluate the real strengths and capabilities they have developed.
Family-owned businesses typically prepare budgets a year or two ahead of time, and they may
evaluate potential investments and acquisitions, so they are thinking about some of the elements
that are involved in strategic planning.
While failure to plan strategically can result in lost business opportunities, neglecting succession
planning can cause a family-owned business to suffer either sudden interruption upon the
unexpected death of a key leader, or a more gradual loss of the talent needed to sustain success.
Problems with commingling of family and business resources, cash flow, equity, and debt can
complicate succession planning in family businesses. Succession issues can be particularly
challenging when multiple family members share ownership and responsibilities for the business
without parameters that are clearly written out.
With an appropriate decision-making structure in place, a family-owned business can focus on
strategic initiatives that are in everyone’s best interests. For effective strategic planning,
family-owned companies should:
• Focus on goals, not tactics. A strategic plan establishes the company’s goals and
direction, while a business plan lays out the tactics needed to pursue the goals.
• Invite input. People are more motivated to achieve goals that they helped create.
• Be prepared for change. After examining the goals for the future and the present
situation, you will create a business plan to execute the strategic plan. And you may discover that
different approaches are needed to roles and the way the business operates.
• Set a timeline and assign responsibilities. Although the CEO and board own the plan,
other managers will drive specific elements of it, and they will need resources to accomplish
objectives.
• Measure and adapt. Key performance indicators help in evaluating progress.
• Communicate. Share both the plan and the progress you are making toward
accomplishing it. This can help build momentum toward your goals.
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GETTING HELP
Family-owned businesses need to consult experts, when necessary, to assist them as they strive
to build their plans for strategy and succession. CPAs, as their trusted advisor can play an
important role for family-owned businesses as they attempt to create a successful structure.
Often their succession plan is not fully developed or sustained over time, so it does not provide
the security the business needs.
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TAX REFORM AS BIGGEST CHALLENGE
An 85 percent majority of corporate tax executives perceive tax reform as the biggest challenge
they’re facing in the months ahead, according to a new survey.
The survey, by Bloomberg BNA, polled more than 250 corporate tax executives at public and
private corporations around the country. Most of them perceive the overhaul of the federal tax
code as their chief concern as they worry about the impact it will have on their companies. Over
half the survey respondents are uneasy about some of the possible reforms, including proposals
for a border adjustment tax, territorial tax system and limitations on interest deductions.
Corporate tax executives are also worried about international tax changes, including
country-by-country reporting requirements, cited as a challenge by over six out of 10 tax
practitioners. Almost three out of 10 of them expect their companies will operate in more
international jurisdictions in the year ahead.
Tax executives are also dealing with challenges at their companies, especially the absence of
alignment between their accounting systems and their tax compliance or provision processes.
Despite the expected tax reform overhaul, 52 percent of the tax managers polled anticipate no
change in staffing levels while 40 percent are looking to add more employees. Mergers and
acquisitions are on the horizon, with 81 percent of the respondents expecting their companies to
pursue such deals in the year ahead.
“As highlighted by the survey’s findings, corporate tax professionals are facing a wealth of
challenges as they look to prepare their businesses for what could be seismic changes,” said
George Farrah, editorial director of Bloomberg BNA’s Tax & Accounting division, in a
statement.
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DOMESTIC & FOREIGN CHILD ADOPTIONS: TAX CONSEQUENCES
We favor Americans adopting American children from foster care when feasible, but current
U.S. tax law benefits domestic and foreign child adoptions.
The tax law enables adopters to replace American adoptees with foreign adoptees. As a result,
Americans children are waiting longer than ever in foster care for their permanent families.
IR Code Section 23 of the tax code permits the child’s adopter to receive both the adoption credit
and employer-provided adoption assistance benefits. (Section 23 specifies qualified adoption
expenses, child eligibility, limitations, and timing and filing requirements. IRS Topic 607
describes the general tax provisions. Form 8839 provides instructions.)
Domestic and Foreign Adoptees
Section 23 applies to a potential adopter seeking to adopt a child. That adoptee can be an
American child or a foreign child. Section 23(e) imposes timing compliance restraints for a
foreign adoptee.
• A domestic potential adopter, seeking to adopt a U.S. child, can take into account
the qualified adoption expenses the potential adopter paid before the year in which the
adoption became final. The potential adopter can claim these amounts as a credit for the
tax year following the year the potential adopter makes payment. The potential child
adopter can claim these adoption benefits even though the potential adopter never
finalizes the adoption, and even if the potential adopter never identified the child for the
domestic adoption.
• The potential adopter of the foreign child can claim eligible expenses before the
adopter undertakes its adoption effort or after the adoption. The adoption must be final
before the adopter can claim the tax benefit.
Foreign Children
Undertaking a foreign adoption is not for the faint of heart. The prospective parent begins with
the potential applicable transnational adoption process, the Hague Convention on the Protection
of Children and Co-operation in Respect of Intercountry Adoption. Some 75 countries, including
the United States, are members of the Hague Adoption Convention.
The prospective parent needs to ascertain whether the adoption is covered by the Hague
Adoption Convention procedures. Rev. Proc. 2010-31, 2010 I.R.B. 413, covers Hague adoptions.
Rev. Proc. 2005-31, 2005 I.R.B. 26 covers non-Hague adoptions The U.S. Department of State’s
Office of Children’s Issues issued an intercountry adoption guide, but it does not address the
relevant tax adoption issues.
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According to the State Department, at present 500,000 children are in the U.S. foster care
system, while 115,000 children are waiting to be adopted. Dave Thomas’ Foundation for
Adoption pegs the number of children waiting in foster care at 110,000.
The Hague Convention limits the child’s age to a 16-year maximum. The adopter must be
married, or be an unmarried person at least 25 years of age. The adopter must certify to the
child’s lack of infectious diseases. The convention does not require a comprehensive medical
assessment.
Some countries use guardianship decrees as part of the adoption process. The State Department
specifies that Islamic Family Law decrees might not meet the U.S. immigration law
requirements. In many cultures, but not all, the adopter provides “gifts” for the child’s prior
abode. The United States might treat the making of such gifts as a bribe.
The United States government now plays an active role in the international adoption process.
The intended adopter must secure approval from U.S. Citizenship and Immigration Services.
This USCIS process focuses on the intended adopter, not on the child being adopted. This U.S.
government process includes a home study about the adopter, together with detailed personal,
financial and medical information about the family, plus personal references, proof of the
adopter’s health, life insurance, fingerprint clearances, verification of employment and more.
The potential adopter needs to file Form I-600A for non-Hague adoption cases, requiring 12
pages of intrusive data and paying a minimum $775 fee. The adopter can file Form l-800A for
Hague adoption cases, including 16 pages of more intrusive data and paying a minimum $775
fee. The adopter’s state of residence impacts this adoption process.
Foreign countries have their own adoption rules. Some countries permit single family adoptions;
others don’t. The foreign country might require the adopter have a requisite revenue source, or
might impose a religious test—an issue that our State Department avoids. A number of countries
impose age requirements on the adopter. Nevertheless, the adopter needs to have a sense of
fortitude and patience to proceed with the adoption process.
An adoptee must meet home country residence rules before the adoption process begins. If an
adopter is seeking to adopt a child from a non-Hague country, this child must be an “orphan,” a
term that has its own country-by-country definition. Hague Convention countries use the term
“Convention adoptee.” The adoption process differs if the child’s birth parents are still living.
The adopter must obtain a release under local law providing a legal and irrevocable release for
adoption from these parents.
Applying U.S. immigration rules are difficult for the adopter, even if the adopter undertakes to
apply the USCIS rules, foreign rules and state rules, and even if the adopter has legal custody of
the child before securing full adoption. The adopter can apply for an IH-4 immigrant visa for a
child from a Hague Convention country or apply for an IH-4 immigrant visa for a child from a
non-Hague Convention country. The State Department encourages the adopter to secure U.S.
citizenship for that child “as soon as possible.”
16
The U.S. imposes different visa rules if the adopter finally adopts the child abroad. The adopter
can apply for an IH-4 VISA for a child from a Hague Convention country or apply for an IR-3
immigration visa from a child from a non-Hague convention country.
The IR-3 VISA indicates that the adoption process has been complete in the child’s native
country. Under an IR-3 VISA, the child is immediately granted citizenship upon entering the
U.S., if at least one of the adoptive parents is a U.S. citizen. The IR-3 VISA also ensures that all
rights and responsibilities of the biological parents have been properly severed and grants those
same rights and responsibilities to the adoptive parents as if the adoption had taken place
domestically.
The IR-4 VISA is granted when one or more of the above requirements are not met. In these
instances, any state required pre adoption procedures or rules must be completed in the U.S.
Parents and child are not afforded the same rights and responsibilities as a domestic adoption and
the child is not granted U.S. Citizenship until the adoption process is completed.
International adoptions are extremely costly for the adopter. The potential adopter must
run the gamut of both foreign adoption procedures and U.S. adoption procedures.
******
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