Blogs - PWB

Spouses Are Guilty Until Proven Innocent

March 18, 2019 By PWB CPAs

When you got married, you knew it was for “better or worse.” But you might not know about laws that hold you responsible if your spouse cheats on a tax return.

Married couples filing jointly should be aware that:

You are both responsible for tax, interest and penalties — even after a divorce or the death of a spouse.
The IRS may hold you responsible for all the tax due even if there is a divorce decree stating that your ex-spouse is accountable for previous joint returns.
You can be liable for tax even if none of the income on a tax return is attributed to you.

To illustrate how the law works, let’s say you have a wage-earning job and your spouse is self-employed. You file joint tax returns.

Next year, you get divorced and a year later, the IRS audits your tax return. Your ex-spouse is nowhere to be found and auditors determine that he or she didn’t report all the income from the business.

What Could Happen?

You are generally liable for paying the tax due, plus interest and any penalties. Your wages can be seized by the IRS even if you paid every penny owed on your share of the family income.

Fortunately, there may be a way to get off the hook. In some situations, the tax law provides “innocent spouse” relief if you can prove:

There is a substantial understatement of tax attributable to the grossly erroneous items of your spouse or ex-spouse.
The hidden income belonged to your ex-spouse and you didn’t benefit from it.
You didn’t know or have reason to know about the understatement.
It would be inequitable to hold you liable.

In January of 2012, the IRS released proposed streamlined procedures that make it easier to obtain equitable relief. In addition, the new guidelines includes an exception to the requirement that items must be attributable to the ex-spouse when that spouse’s fraud is the cause of the understatement or deficiency.

Be aware that the IRS is required to notify an ex-spouse that relief has been requested so that he or she can elect to participate. There are no exceptions, even for victims of domestic violence.

“Innocent” versus “Injured” Spouse

If your current or former spouse has gotten you into tax trouble, you may be able to get help from the IRS.

It all depends on whether the tax agency considers you “injured” or “innocent.” You probably think you qualify as both but they are two different legal terms:

An injured spouse files a joint return and loses all or part of a refund because of a spouse’s debts.

An innocent spouse claims no liability for items on a joint tax return that belong to a spouse or ex-spouse.

Let’s say you and your current spouse file a joint tax return and are expecting a large refund. But you receive a notice from the IRS stating that your refund is being seized to pay a debt owed only by your spouse. For example, back taxes from before you married, past due child support, a delinquent student loan or other federal debt.

You may be able to recover your portion of a joint tax refund that the IRS seized. To qualify, you must have earned your own income and made your own federal tax payments. Ask your tax adviser for more information if you think you qualify.

Advice: Don’t count on innocent spouse relief if you know your spouse is cheating on tax returns. The IRS often denies relief.

Consider filing separate tax returns — especially if you’re in the process of a divorce. It may save you a bundle in the future. For more information about your situation, consult with your tax advisor.

What Do the New Revenue Recognition Rules Mean for Franchisors?

February 21, 2019 By PWB CPAs

By Bryan A. Ekern, CPA

As usual, there’s much to think about at the start of a new year. If you’re a franchisor, revenue recognition should be top of mind as you plan for 2019. That’s because on January 1, 2019, the Financial Accounting Standards Board’s new revenue recognition rules went into effect for private companies (the rules went into effect for public companies on January 1, 2018). Technically known as “FASB ASC Topic 606, Revenue from Contracts with Customers,” these new rules could significantly alter how you recognize initial franchise fees.

What changes can franchisors expect?

The previous FASB rules required franchisors to recognize initial franchise fees upon substantial performance of their obligations to the franchisee, which generally resulted in recognition upon the opening of the unit. The new rules, however, may require franchisors to recognize these fees over the term of the franchise agreement, or when certain performance obligations are met. For instance, instead of recognizing a $50,000 increase in revenue at a new store’s opening, the franchisor must now recognize the amount over a period of what could potentially be several years.

What about performance obligations?

A performance obligation is a contracted agreement to provide a distinct good or service to a customer. In the event of a franchise unit opening, performance obligations might include site selection, equipment, manuals, training, and, of course, the use of the franchisor’s intellectual property (e.g., its trade name).

Theoretically, a franchisor could recognize a portion of the initial franchise fee upon the completion of each activity—in accordance with the franchise agreement, of course. But this is where it gets tricky. Other than equipment, performance obligations related to opening a unit will not likely be considered distinct. This is because they provide little or no benefit without intellectual property.

What should you do now?

First, be sure you understand the aforementioned FASB rules. Then, it’s a good idea to review your contracts to identify any performance obligations related to the initial opening of a unit. Next, determine which performance obligations are distinct and when each distinct performance obligation is typically completed. Generally, performance obligations are either completed at a point in time or over the course of time, the latter of which will likely be the case if the performance obligation involves the use of intellectual property.

Act now to start 2019 off on the right foot.

As you can see, the new revenue recognition rules could dramatically change the way you recognize your initial franchisee fees. Taking time to get acquainted with the rules and the details of your contracts as soon as possible could help you avoid unnecessary process changes and headaches. If you have questions about how you might be impacted, please give us a call, and we’ll help you sort it out.

Contact your PWB advisor today.

763-550-1100

Could Medicare Premiums Lower Your Taxes?

January 28, 2019 By PWB CPAs

Health care is a top concern for many Americans, especially people who are age 65 and older. While these individuals qualify for basic Medicare insurance, they may need to pay additional premiums to get the level of coverage they desire.

Those premiums can add up to a substantial annual sum, especially if you’re married and both you and your spouse are paying them. But the silver lining is that paying those premiums may help your tax situation.

Medicare Basics

For starters, many people are unclear about Medicare health insurance programs and options. Here’s a brief overview.

Medicare Part A. This coverage is commonly known as hospital insurance. It covers inpatient hospital care, skilled nursing facility care and some home health care services.

Part A is free to people over age 65 who paid Medicare taxes for 40 or more quarters during their working years. They’re considered to have already paid their Part A premiums via Medicare taxes on wages and/or self-employment income.

People who didn’t pay Medicare taxes for enough months while working generally must pay for Part A coverage. The premium amount depends on how many quarters the individual paid taxes into the program.

If you paid Medicare taxes for 30 to 39 quarters during your working years, the 2019 Part A premium is $240 per month ($2,880 for the full year).
If you paid Medicare taxes for less than 30 quarters, the 2019 Part A premium is $437 per month ($5,244 for the full year).
The same Part A premiums apply to a spouse who paid Medicare taxes for less than 40 quarters while working.

Medicare Part B. This coverage is commonly called Medicare medical insurance. It mainly covers doctors and outpatient services. Medicare-eligible individuals must pay monthly premiums for this benefit. The premium amount depends on the individual’s modified adjusted gross income (MAGI) for two years earlier.

For example, your 2019 premiums depend on your 2017 MAGI. This term refers to the adjusted gross income (AGI) amount plus any tax-exempt interest income.

To get Part B coverage, you have to pay a base premium, which is $135.60 per month ($1,627 for the full year) for 2019. Plus, higher income individuals must pay a surcharge.

For 2019, the Part B surcharge applies to:

Singles with 2017 MAGI in excess of $85,000, and
Married individuals who filed 2017 joint returns with MAGI in excess of $170,000.

Surcharges accrue on a graduated schedule. That is, the more MAGI you earned in 2017, the higher your Part B costs will be for 2019. Including the surcharge (if you owe it), the 2019 Part B monthly premiums for each covered person can be $189.60 ($2,275 for the full year), $270.90 ($3,251 for the full year), $352.20 ($4,226 for the full year), $433.40 ($5,201 for the full year) or $460.50 ($5,526 for the full year).

The maximum premium for 2019 applies to:

Singles with 2017 MAGI in excess of $500,000, and
Married individuals who filed 2017 joint returns with MAGI in excess of $750,000.

Medicare Part D. This option is for private prescription drug coverage. Base premiums vary depending on the plan you select. Higher-income individuals must pay a surcharge in addition to the base premium.

For 2019, the Part D surcharges depend on your 2017 MAGI, and they increase based on the same scale as Part B surcharges. The good news is that the 2019 surcharges are slightly lower than for 2018, except for those in the highest income category. The 2019 monthly Part D surcharge amounts for each covered person can be $12.40, $31.90, $51.40, $70.90 or $77.40.

Medigap. Medicare Parts A and B don’t cover all health care expenses. Coverage gaps include co-payments, co-insurance and deductibles. So, some people opt to buy a so-called “Medigap” policy. This is private supplemental insurance that’s intended to cover some or all gaps.

In most states, insurance companies can sell only standardized Medigap policies that offer the same basic benefits. Some policies offer additional benefits for an additional cost. Premiums vary depending on the plan you select.

Important note: Before you travel outside the United States, find out whether Medicare will cover you while you’re away. Generally, the coverage is limited or nonexistent. If you don’t have coverage when traveling overseas, you can purchase supplemental policies to cover medical expenses incurred outside the United States, including evacuations.

Medicare Advantage. Federal Medicare benefits may be provided through Part A and Part B coverage or through a so-called “Medicare Advantage plan” offered by a private insurance company. Medicare Advantage plans are sometimes called Medicare Part C.

Medicare pays the insurance company to cover your Medicare Part A and Part B benefits. The Medicare Advantage insurance company then pays your claims. A Medicare Advantage plan may also include prescription drug coverage (Medicare Part D), and it may cover dental and vision care expenses that are not covered by Medicare Part B.

Medicare Advantage Plans can include:

HMOs that only cover medical service providers that are in the plan’s network,
PPOs that encourage you to use in-network providers, and
Private fee-for-service plans that generally allow you to go to any medical service provider that accepts the plan’s payment terms.

When you enroll in a Medicare Advantage plan, you continue to pay Medicare Part B premiums to the government. You may need to pay a separate additional monthly premium to the insurance company for the Medicare Advantage plan, but some Medicare Advantage plans don’t charge an additional premium. The additional premium, if any, depends on the plan you select.

Important note: Medigap policies don’t work with Medicare Advantage plans. So, people who join a Medicare Advantage plan should discontinue their Medigap coverage.

Tax Deductions for Medicare Premiums

Premiums for Medicare health insurance can be combined with other qualifying health care expenses for purposes of claiming an itemized deduction for medical expenses on your individual tax return.

For 2018, you could deduct medical expenses only if you itemized deductions and only to the extent that total qualifying expenses exceeded 7.5% of AGI. For 2019, the itemized deduction threshold for medical expenses increases to 10% of AGI, unless Congress extends the 7.5% hurdle.

The Tax Cuts and Jobs Act nearly doubled the standard deduction amounts for 2018 through 2025. For 2019, the standard deduction amounts are $12,200 for single filers, $24,400 for married joint-filing couples and $18,350 for heads of households. So, fewer individuals will claim itemized deductions.

However, having significant medical expenses (including Medicare health insurance premiums) may allow you to itemize and collect some tax savings.

Important note: Self-employed people and shareholder-employees of S corporations can generally claim an above-the-line deduction for their health insurance premiums, including Medicare premiums. So, they don’t need to itemize to get the tax savings from their premiums.

For More Information

Contact your tax advisor if you have additional questions about Medicare coverage options or claiming medical expense deductions on your personal tax return. Your advisor can help determine the optimal overall tax-planning strategy based on your personal circumstances.

6 Benefits of Outsourcing Your Accounting to a CPA Firm

January 14, 2019 By PWB CPAs

By Jeremy Kiecker, CPA

If you’re feeling overwhelmed with your business’ accounting needs, you’re not alone. Many business owners stress over profit and loss statements and bank accounts. But the reality is, you don’t have to. Outsourcing your bookkeeping and accounting functions to a CPA firm can sweep this worry right off of your plate. Here are six benefits of outsourcing your accounting to a CPA firm.

1. Meet your business’ unique accounting needs.

No two businesses are alike, which means that accounting should never be a one-size-fits-all approach. An accounting firm has a menu of service offerings that can be customized to your unique needs. This means you can pick and choose from accounting services such as payroll, accounts payable (for data entry and assistance with bill pay), bank reconciliation, producing financial statements preparation, and more.

Determining exactly which services your business might need requires some thought. At PWB, we walk our clients through what we call a “Discovery Process,” during which we seek to learn more about their specific processes and staff roles. This helps our team better understand how to tailor our services to each client’s business.

2. Make the most of your time—and your technology.

Your time and resources are limited, and, in today’s world, business moves quickly. An accounting firm can keep you from having to worry about the myriad of bookkeeping and compliance tasks that can take you away from revenue-generating aspects of your business. Technology can play a central role in the solution. As self-described “techie accountants,” we’ve helped our clients streamline processes and more with some incredible software platforms and apps. It’s amazing what technology can do—and a business CPA firm can help you make the most of it.

3. Choose the right level of accounting support.

An accounting firm will typically give you options for support. At PWB, for instance, our two primary service packages are oversight or fully outsourced accounting. Oversight might make sense if you have an in-house bookkeeper. In this role, the firm serves as your outsourced CFO to keep your bookkeeper on track, advise as needed, and facilitate outsourced monthly financial statement service discussions. This also gives you an insurance policy: if your bookkeeper leaves, your accountant can step in and keep things afloat.

Fully outsourced accounting, on the other hand, keeps you from having to worry about staff turnover. Instead, you benefit from continuity in your accounting department. An accounting firm that hires top talent will also give you peace of mind that your financials are in highly skilled hands.

Best of all, an accounting firm gives you the benefit of scalable support. As your business evolves, your operations will change, and there may be times when you require more or less accounting support. A CPA firm can scale up or scale back its services accordingly.

4. Get the most bang for your buck.

Working with an accounting firm that charges a fixed fee gives you a known cost, making it easy to budget. Plus, you don’t have to fret about the costs associated with employing a full-time staff member. Instead, you get high-value horsepower right when you need it. This is something that’s particularly important to our PWB team, as we take a value-based approach to serving our clients.

5. Minimize your tax liability.

With an accounting firm on board, you have a highly skilled professional keeping a close eye on your financial information. With this insight, your CPA can make proactive, timely recommendations for tax planning which can help you minimize your tax liability.

6. Easily access the resources you need.

Most CPA firms offer tax, audit, and specialty services in addition to accounting. Working with a firm that offers a full range of services could be highly beneficial if a financial or tax issue were to arise, as you could easily access the expertise you need. At PWB, our advisors come from a variety of backgrounds ranging from the country’s top CPA firms to successful private businesses. With this deep pool of expertise, we’re always ready to go to bat for our clients if needed.

Ready to learn more about how an accounting firm could benefit your business?

Contact your PWB advisor today.
763-550-1100

The New 199A Deduction for Business Owners: It’s Complicated

December 10, 2018 By PWB CPAs

By Asta Stark, CPA

One of the changes ushered in by the Tax Cuts and Jobs Act is a new deduction on a personal tax return for pass-through business owners, called the 199A deduction. For these individuals, the deduction could provide up to a 20 percent tax deduction for qualified business income. The deduction also applies to trusts that own an interest in a pass-through entity. Although the deduction might sound fairly straightforward, calculating it can be a complicated endeavor.

Think you could benefit from the 199A deduction? Here are several factors to consider.

What is your business entity?

The 199A deduction allows pass-through business owners to deduct up to 20 percent of their qualified business income. Qualified business income is—by and large—your ordinary business income. Pass-through businesses include S corporations, partnerships, single-member limited liability companies (LLCs), and so on. Basically, the 199A deduction applies to businesses that are not organized as C corporations, including sole proprietors.

Is your business a specified service trade or business?

If your business is a specified trade organizations financial statement audit service or business (SSTB), the 199A deduction is phased out based on your personal federal taxable income level. Generally speaking, the Internal Revenue Code defines SSTBs as businesses in the fields of healthcare/medical, law,business accounting , actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, and trading. Businesses in trading and dealing with securities, partnership interest, and commodities, or based on the reputation and skill of one individual, such as a social media “influencer,” also fall into the SSTB category. Architects and engineers are not considered an SSTB.

What’s your income level?

The 199A deduction is phased out between the taxable income range of $315,000 and $415,000 for married filers filing jointly, and between $157,600 and $207,500 for other filers (including trusts). If your income exceeds the top range and your business is an SSTB, you will not be able to take advantage of the 20 percent deduction. If your business is not an SSTB, the deduction cannot be phased out; however, the 199A limitation applies. In this case, you can still take the deduction as long as your business has unadjusted basis of qualified property and/or W-2 wages. The math to calculate the total amount of the deduction gets complicated.

Additional factors to consider:

After all the calculations are done, the 199A deduction cannot be higher than 20 percent of your adjusted taxable income. If you have several businesses, the deduction is calculated separately for each business. If your businesses meet certain requirements, however, there’s an option to aggregate. In some cases, this could provide you with a higher deduction. Again, it’s complicated.

Planning is critical.

Determining if and how you could benefit from the 199A deduction could take time. In certain situations, it may be advantageous to change entities or explore ways to reduce your taxable income. Acting sooner rather than later can help you make the most of any tax benefit the 199A deduction could provide.

Contact your PWB advisor today.

763-550-1100

763-550-1100

PWB Blog

Spouses Are Guilty Until Proven Innocent

What Do the New Revenue Recognition Rules Mean for Franchisors?

Could Medicare Premiums Lower Your Taxes?

Medicare Basics

6 Benefits of Outsourcing Your Accounting to a CPA Firm

1. Meet your business’ unique accounting needs.

2. Make the most of your time—and your technology.

3. Choose the right level of accounting support.

4. Get the most bang for your buck.

5. Minimize your tax liability.

6. Easily access the resources you need.

Contact your PWB advisor today.
763-550-1100

The New 199A Deduction for Business Owners: It’s Complicated

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Bloomington Office

Recent Blog Posts

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PWB Blog

Medicare Basics

1. Meet your business’ unique accounting needs.

2. Make the most of your time—and your technology.

3. Choose the right level of accounting support.

4. Get the most bang for your buck.

5. Minimize your tax liability.

6. Easily access the resources you need.

Contact your PWB advisor today. 763-550-1100

Plymouth Office

Bloomington Office

Recent Blog Posts

Looking for Something?

Contact your PWB advisor today.
763-550-1100