“Use-or-Lose” Rule for FSAs

Notice 2013-71 contains modifications to the rules for §125 cafeteria plans. This modification permits §125 cafeteria plans to be amended to allow up to $500 of unused amounts remaining at the end of a plan year in a health FSA to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, provided that the plan does not also incorporate the grace period rule. This carryover of up to $500 does not affect the maximum amount of salary reduction contributions that the participant is permitted to make under §125(i) of the Code ($2,500 adjusted for inflation after 2012).

It’s That Time of the Year Again — Annual Renewals Due by December 31

All registered businesses and nonprofits must renew their filing each calendar year — for most businesses there is no charge. This can be done online or by mail.

Businesses required to file include corporations, limited liability companies (LLCs), partnerships and nonprofits. Failure to renew will result in dissolution.

By now you’ve heard the screaming over outages and other glitches in www.HealthCare.gov, the Web site for the new federal Affordable Care Act. In short, it’s swamped and it can’t keep up with demand from the public. It now appears that, once the site is reliable, some consumers may find gaps in the affordability of their insurance under the new health care system.

One gap — nicknamed “the family glitch” on the Internet — already has come to light.  Briefly, some taxpayers could end up paying unaffordable costs for insuring dependents because of the way “affordable” is interpreted.

Here’s the gap in the law. Most employers are required to offer health insurance to both employees and their families, or dependents.  However, the new regulations require “affordable” premiums only for employee’s portion of the insurance – not for the dependent coverage. Employers can decide to bear more of the cost to make family coverage less burdensome, but that is not required.

At the same time, the new law requires all parents to buy health insurance for their dependents or to pay penalties at tax time. (There are some exceptions for low-income people receiving government assistance and other situations..)

The ACA foresaw that some people would be stuck paying unaffordable premiums and authorized a federal tax credit to help pay them. But consumers caught by this “family glitch” cannot claim the credit because, technically, the insurance obtained through their job is regarded as “affordable.”

The Affordable Care Act is extremely complicated, and we expect some current gaps will be closed as rules are revised in coming months. In the meantime, employers should alert workers about their rights and consumers should decide how they will seek insurance, if they don’t already have it.

We at EricJohn Ltd. can help both employers and consumers in navigating the new Affordable Health Care Act.

 

One of the easiest steps an owner can take when starting a business is to open a separate checking account.  Yet many sole proprietors — and even some self-filed corporations — choose to use their personal checking accounts for business.  I see this as a big mistake, and here’s why:

1. Comingling business and personal dollars can be extremely confusing when an owner and/or accountant must reconcile the business’s finances. It could even lead to lost deductions or tax credits!
2. Separate accounts also make it harder for owners to raid their company’s cookie jar!  As a rule of thumb, even small businesses should establish and keep a $5,000 reserve in their checking accounts. This may be very difficult for a new businesses, but owners should set it as a short-term goal.
3. For small business corporations, mixing personal with corporate expenses pierces the protective legal shell enjoyed by the corporation. It opens the business to increased liabilities.
4. Finally, commingled funds could cause extra taxes and will cause larger  professional fees if the company is audited.  State and federal tax agencies like to use the “deposit method” to reconcile a business’s income.  In short, all deposits, from any bank account are considered to be income until proven to be personal in nature.  This proof can be very tricky to find in archived records.  Those records also may be costly to obtain from your bank for audits, which typically are conducted two to three years down the road.  In most cases, the audit agent will dismiss reviewing your personal checking records if you maintain separate “business” bank accounts.

My advice:  For your peace of mind– both business and personal — don’t mingle your money!

Eric

The Affordable Care Act (ACA) requires employers to provide all new hires and current employees with a written notice about ACA’s Health Insurance Marketplace, or exchanges, by October 1, 2013. The Department of Labor (DOL) has provided two sample exchange notices, one for employers who offer a health plan to some or all employees and one for employers who do not offer a health plan. Employers may use one of these models, as applicable, or a modified version, provided the notice meets the content requirements described above. The DOL website has many FAQs, most notably, the following:

Q: Can an employer be fined for failing to provide employees with notice about the Affordable Care Act’s new Health Insurance Marketplace?

A: No. If your company is covered by the Fair Labor Standards Act, it should provide a written notice to its employees about the Health Insurance Marketplace by October 1, 2013, but there is no fine or penalty under the law for failing to provide the notice.

An S corporation is a kind of special case for reporting cancellation of debts, whether they involve mortgages or other indebtedness.

In short, a solvent S corporation gives the proceeds from cancellation of debt directly to its shareholders, and they must pay tax on that income.  It is reported on IRS Form 1120S as “Other income.”

A bankrupt or insolvent S corporation is entitled to exclude the income coming from debt cancellation on its tax return. It shows that on IRS Form 982. The underlying shareholders generally do not owe tax on that income. Be cautious, though. Some tax could be due when an S corporation is insolvent on its books, but has not yet filed bankruptcy.  That’s a time to check with a tax professional such as EricJohn Ltd.

Did the 2008 housing market crash finally catch up to you, as it did with so many Americans?

 If it did, you’re not alone.  I’m your witness! During my first 16 years in the trenches of tax accounting – filing tax returns, providing tax planning, and resolving IRS and state tax issues for clients – I prepared only three returns reporting cancellations of debts.

Yes, just three.

But in the last four tax seasons, I’ve filed 12 federal returns with cancellation-of-debt forms, 1099-C and/or 1099-A. I have three more returns scheduled for the current year.  Yikes!

This once shameful financial issue has become so common, that many taxpayers now are talking openly with others about their mortgage debt dilemmas and tax issues surrounding them. Taxpayers are searching nervously for solutions to what appear to be very large tax bills.

Some simply will pay Uncle Sam and forget this awful time in their lives. But, in some circumstances, IRS codes do allow taxpayers to exclude at least part of the canceled debt on a mortgage.  In short, you might not need merely to write a check to the IRS.  A little fact-finding might reduce or eliminate taxation on your debt.   

At the same time, this tax issue is complex and daunting! At EricJohn Ltd., we are able to look for the important facts and put them in place on your tax returns. Frankly, in my practice, I’ve found that a majority of clients have very little, if any, tax due.

If you like to self-prepare your return, here are some items you’ll need:

Information required to figure any tax due:

• Effective date for cancellation of debt.
• FMV (Fair Market Value) of the property on the day before cancellation.
• Was the property for personal or business use?
• Was the debt(s) recourse or non-recourse?
• Does a Form 982 exclusion apply? (See below.)

Tax forms you may need to file:

• Form 982 – Reports the amount of canceled debt associated with an exclusion item and any adjustments to the property’s basis.
• Schedule D – Reports taxable gain (or non-allowed loss) on property associated with the canceled debt.
• Form 4797 – Reports gain or loss on business property associated with the canceled debt.
• Form 1040, Line 21 – Reports the taxable portion of the canceled debt.

 

 

 

If you try to file your federal tax return as early as possible each year, be prepared for a slowdown in the 2013 filing season.

It seems the new Affordable (Health) Care Act may complicate filings for taxpayers affected by it. Among other things, they simply may not receive all the tax documents related to the new health care act by the end of January 2014, as has been required in past years.

Here are some effects expected from the new law:

• Every household seeking a tax credit for insurance premiums paid into the new health insurance exchange program now will be required to file a full tax return.  The requirement applies even if the taxpayer’s income is below the regular threshold for filing a return.
• It is going to take additional new health information to file an accurate return.
• Parents will be responsible for any health premium penalty for a dependent claimed on their tax return.
• State and federal tax rules may differ, further complicating the tax returns.

One more common benefit also will be affected. Flexible Spending Account (FSA) contributions into your employer pretax health reimbursement plan will be limited to $2,500 for 2013.

Ask us at EricJohn Limited or your tax professional to steer you through the ins and outs of the new Affordable Health Care Act.

Tomorrow (Aug. 15) is the formal due date for refund of 2012 property taxes. Now, there’s no need to panic if you or your tax advisor haven’t filed that return yet. The state Department of Revenue says homeowners and renters will get a grace period of one year, pushing out the effective deadline for filing a 2012 return to Aug. 15, 2014. But, if you haven’t filed for a refund of your 2011 property taxes, you will have to rush. That refund expires tomorrow. Submit Form M1PR by the end of the day