Expenses qualifying for the child care credit

Working parents can find summer child care solutions challenging. However, a nonrefundable credit is available if the qualifying child care expense is incurred so that you (and your spouse, if married) can work. The maximum credit is 20%–35% (depending on your adjusted gross income) of the lesser of (1) your qualifying child care expenses up to $3,000 for one and $6,000 for two qualifying individuals or (2) your earned income (or your spouse’s, if less).

Qualified child care expenses provide for the well-being and protection of a dependent child under age 13 and must be reduced by the amount of any employer-provided dependent care benefits. Amounts paid for food and education generally are not considered work-related expenses; however, services that are incidental to and cannot be separated from the costs of caring for a child are not excluded from the credit. Therefore, expenses paid to a day care center are usually eligible for the credit, whereas summer school or tutoring expenses are not. The cost of day camp should qualify for the credit; however, overnight camps are not considered work-related and don’t qualify.

If you pay someone to come to your home and care for your dependent child, you may be a household employer required to withhold and pay Social Security and Medicare tax and pay federal unemployment taxes. Keep these rules in mind as you plan summer child care. Have more tax questions? Contact us.

© 2014

Getting around the $25 deduction limit for business gifts

Sometimes doing business entails making gifts to customers, clients, employees, and other business entities and associates. For numerous reasons, such gifts often make perfect business sense. Unfortunately, the tax rules limit the deduction for business gifts to a less-than-generous $25 per person per year — a limitation that hasn’t been raised in decades. When this limit was added into law back in 1962, the $25 gift deduction limit wasn’t really an issue for any but the most extravagant taxpayers. After all, the price of a first class stamp at the time was 4¢ and a 100% wool men’s suit could be had for $45 or less.

Fifty-two years later, the $25 limit is unrealistically small in many business gift-giving situations. Fortunately, there are a few exceptions to this rather restrictive limit. When one of these exceptions applies, you typically have no limit (or at least, a much higher limit) on the deduction for business gifts.

Here’s a quick rundown of the major exceptions to the $25 limit.

Gifts to a business entity vs. an individual. The $25 limit only applies to gifts directly or indirectly given to an individual. Thus, gifts given to a company for use in the business aren’t subject to the limit. For example, a gift of a $200 reference manual to a company for its employees to use while doing their jobs would be fully deductible because it’s used in the company’s business.

Gifts to a husband and wife. If you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50.

Only direct costs are limited. The incidental costs of making a gift aren’t subject to the limit. Thus, the costs of custom engraving on jewelry and the costs of packing, insuring, and mailing a gift are deductible over and above the $25 limit for the gift itself.

Gifts to employees. Although employee gifts have their own limitations and may be treated as compensation, an employer is allowed to deduct the full cost of gifts made to employees.

Gifts vs.entertainment expenses. Entertainment expenses are normally only 50% deductible and gifts, of course, are typically 100% deductible, but only up to the first $25 of cost per donee per year. In some situations related to gifts of tickets to sporting and other events, a taxpayer may choose whether to claim the deduction as a gift or as entertainment. The gift deduction is a better deal for lower-priced tickets, but once the combined price of the gifted tickets exceeds $50, claiming them as an entertainment expense is more beneficial.

As you can see, there are several exceptions to the $25 rule, so many businesses will be able to meet at least one of them. To the extent your business qualifies for any of these exceptions, it’s important that the qualifying expenses be tracked separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.

Also, to obtain any deduction for a business gift, even the miserly $25 gift deduction, you must retain documentation supporting the following: (1) the gift’s cost and a description of it, (2) the date it was acquired, (3) the business purpose of the gift, and (4) the business relationship to the taxpayer of the person receiving the gift.

If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full deduction or how to properly isolate and account for them in your records, please call us so we can help you get to the right answers.

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Do you need to adjust your federal income tax withholding amount?

With over half the year already gone, now is a good time to check to see if you are on track to have about the right amount of federal income tax withheld from your paychecks for 2014. The problem with not having the correct amount of taxes withheld for the year is that:

  • If your taxes are significantly underwithheld for the year, you risk being hit with a nondeductible IRS interest rate penalty.
  • If your taxes are significantly overwithheld for the year, you are basically making an interest-free loan to the government when you could be putting that money to work for you.

Neither situation is good. The simplest way to correct your withholding is by turning in a new Form W-4 (“Employee’s Withholding Allowance Certificate”) to your employer. Taking this action now will adjust the amount of federal income tax that is withheld from your paychecks for the rest of 2014.

Specifically, you can adjust your withholding by increasing or decreasing the number of allowances claimed on your Form W-4. The more allowances claimed, the lower the withholding from each paycheck; the fewer allowances claimed, the greater the withholding. If claiming zero allowances for the rest of the year would still not result in enough extra withholding, you can ask your employer to withhold an additional amount of federal income tax from each paycheck.

While filling out a new Form W-4 seems like something that should be quick and easy, it’s not necessarily so — because the tax rules are neither quick nor easy. Fortunately, there is an online Form W-4 calculator on the IRS website at www.irs.gov that can help to make the job simpler. From the IRS home page, click on the “More …” link under “Tools.” Then click on the “IRS withholding calculator” link. You will see the entry point for the online calculator. It’s pretty easy to use once you assemble information about your expected 2014 income and expenses, plus your most recent pay stub and tax return.

Please understand that the IRS calculator is not perfect. (Remember, it’s free, and to some extent, you always get what you pay for.) However, using the calculator to make withholding allowance changes on a new Form W-4 filed with your employer is probably better than doing nothing, especially if you believe you are likely to be significantly underwithheld or overwithheld for this year.

Of course, if you want more precise results, we would be happy to put together a 2014 tax projection for you. At the same time, we can probably recommend some planning strategies to lower this year’s tax bill. Contact us for details.

© 2014

William Cuervo Joins Appelrouth Farah & Co. As a Tax Manager

William CuervoAppelrouth, Farah & Co., P.A., is pleased to announce that William Cuervo, CPA has joined the firm’s Coral Gables office as a tax manager. Prior to joining the firm, Cuervo was a controller at Statetrust Capital, LLC.

In his new role at Appelrouth, Farah & Co., Cuervo trains and develops accounting staff; conducts tax research and planning; prepares and reviews tax returns; as well as services clients in accounting and tax matters.

Cuervo has worked in the financial and accounting field since 1990 when he worked as the chief financial officer for United Information Systems, Inc. He has a keen understanding of numbers and an appreciation for its ever-changing nature. He enjoys helping clients resolve their financial and tax problems by getting to the root of the issue. In addition, Cuervo’s knowledge of tax code is essential in keeping clients not only informed, but also in compliance. 

Born in Newark, New Jersey, Cuervo moved to South Florida when he was four years old. He earned a Bachelor’s degree in accounting as well as a Master’s degree in taxation from Florida International University.  He is a Certified Public Accountant and a member of the Florida Institute of Certified Public Accountants and American Institute of Certified Public Accountants. In addition to his work at Appelrouth, Farah & Co., Mr. Cuervo has taught accounting and taxation classes at the undergraduate and graduate level for the Keller Graduate School of Management at Devry University and for Nova Southeastern University, since 2002. He has also taught for the Becker CPA Review Program since 2002.

Cuervo can be reached at 305.444.0999, extension 262 or at william@appelrouth.com.

Tips for administering your company’s 401(k) plan

Offering a 401(k) plan can help your company recruit and retain quality employees. But this type of plan requires you to adhere to stringent rules and maintenance requirements.

Regular review

Effective administration of a retirement plan involves a team, including the employer and plan sponsor, and possibly a CPA, third-party administrator, investment advisor, or specially designated group of trustees or board members. Check in regularly with your employee benefits advisor to ensure everyone is performing his or her role adequately.

Also ensure that you’re fulfilling your responsibility to the plan. For example, have you funded your employee and employer contributions on time? Have you properly classified seasonal employees and independent contractors? Are employee census data and forms up to date?

Don’t discriminate

After the end of a 401(k) plan year, you’re required to perform certain tests. If your business makes an employer contribution, you’ll need to ensure your plan covers the correct employees and has funded the correct amounts.

One potential test is the actual deferral percentage (ADP) / actual contribution percentage (ACP) test. It ensures that contributions don’t discriminate in favor of highly compensated employees and may require the return of “excess contributions” by the highly paid group. To prepare for this test, keep payroll records up to date and accurate, including items such as compensation and deferral amounts.

Changes, changes

Every plan has an enrollment date designating when employees can enter the plan (often quarterly or monthly). New employees also may need to accrue a period of service before becoming eligible. Regularly review your enrollment materials to ensure they adequately explain these dates to employees.

You may want to consider how often a participant can make election changes. For example, suppose an employee wants to change the amount he or she defers into your 401(k) plan. Your plan document needs to state when the participant can make this change.

If you wish to make any changes to your company’s plan, you’ll generally need to do so before the start of the next plan year. This includes opting to become a safe harbor plan, which guarantees the plan will pass certain discrimination tests as long as the employer makes a certain level of contributions.

Another plan change that can be made only before the start of the next plan year deals with accrued benefits. You can’t reduce already-earned accrued benefits, such as entitlement to a contribution. Like accrued benefits, restrictions to vesting schedules must be put in place before the start of the plan year. Similarly, expanding 401(k) plan features is usually better done before the beginning of the plan year.

Shift the burden

Overseeing a 401(k) plan and ensuring it meets regulatory requirements can be complex and time consuming. For this reason, many companies contract with a third-party administrator. Although you’ll remain ultimately responsible for the plan, a third-party administrator can make managing it easier.

Want to learn more? Contact us to speak with team member in our business advisory service area. 

© 2014

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