An employer enjoys several advantages when it classifies a worker as an independent contractor rather than as an employee. For example, it isn’t required to pay payroll taxes, withhold taxes, pay benefits or comply with most wage and hour laws. However, there’s a potential downside: If the IRS determines that you’ve improperly classified employees as independent contractors, you can be subject to significant back taxes, interest and penalties.

To determine whether a worker is an employee or an independent contractor, the IRS considers three categories of factors related to the degree of control and independence:

1. Behavioral. Does the employer control, or have the right to control, what the worker does and how the worker does his or her job?

2. Financial. Does the employer control the business aspects of the worker’s job? Does the employer reimburse the worker’s expenses or provide the tools or supplies to do the job?

3. Type of relationship. Will the relationship continue after the work is finished? Is the work a key aspect of the employer’s business?

Determining the proper classification under these factors may not be easy. If you’re concerned you may have misclassified workers, please contact us.

With the gift and estate tax exemptions currently at $5.34 million, you might think that estate valuations are less important. But even if you believe that your estate’s value is under the exemption amount, it’s still important to know the value of your assets.

First, your estate might be worth more than you think. For example, if you own an insurance policy on your life, the death benefit will be included in your estate, which may be enough to trigger estate tax liability.

Second, obtaining a qualified appraisal can limit the IRS’s ability to revalue your assets. If you make gifts that exceed the $14,000 annual gift tax exclusion, you’ll need to file a gift tax return, even if the gift is within your lifetime exemption. Generally, the IRS has three years to audit gift tax returns and challenge reported values for gifted assets. But that period doesn’t begin until the gift has been “adequately disclosed.”

For assets that are difficult to value — such as closely held business interests or real estate — the best way to satisfy the adequate-disclosure requirements and avoid an IRS challenge is to include a qualified professional appraisal with your return.

Please contact us for more information on properly valuing your assets. We can help you comply with IRS requirements and keep taxes to a minimum.

Summer is a common time to put a home on the market. If you’re among those who are following this trend, it’s important to be aware of the tax consequences.

If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the Affordable Care Act’s 3.8% net investment income tax.

A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

If you have a home on the market, please contact us to learn more about the potential tax consequences of a sale.

Restricted stock is stock that’s granted subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk or you sell it. You then pay taxes on the stock’s fair market value at your ordinary-income rate.

But you can instead make a Section 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, can be beneficial if the stock is likely to appreciate significantly. Why? Because it allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.

There are some potential disadvantages, however:

• You must prepay tax in the current year — which also could push you into a higher income tax bracket or trigger or increase the additional 0.9% Medicare tax.
• Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or sell it at a decreased value.

If you’ve recently been awarded restricted stock or expect to be awarded such stock this year, work with us to determine whether the Sec. 83(b) election is appropriate for you.

In general, when meal and entertainment expenses are incurred in the context of an employer-employee or customer–independent contractor relationship, one party will be subject to a 50% limitation on the deduction. But which party? Last year, the IRS finalized regulations that address this question.

In the employer-employee setting:

• If the employer reimburses the employee for meal or entertainment expenses and treats the reimbursement as compensation, the employee reports the entire amount as taxable income. The employer deducts the payment as compensation, and the employee may be able to claim a business expense deduction, subject to the 50% limit.
• If the employer doesn’t treat the reimbursement as compensation, the employee excludes the entire amount from taxable income and the employer deducts the expense, subject to the 50% limit.

In a customer–independent contractor setting, the final regulations allow the parties to agree as to who will be subject to the 50% limit. If there isn’t an agreement, then:

• If the contractor accounts to the customer for meal and entertainment expenses reimbursed by the customer (i.e., properly substantiates the expenses), the 50% limit applies to the customer.
• If the contractor doesn’t, the limit applies to the contractor.

The rules surrounding meal and entertainment expense deductions are complex. Please contact us to ensure you’re making the most of the deductions available to you but not putting yourself at risk for back taxes, interest and penalties.

First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan. It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty. Here are three alternatives:

1. Stay put. You may be able to leave your money in your old plan. But if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult. Also consider how well the old plan’s investment options meet your needs.

2. Roll over to your new employer’s plan. This may be beneficial if it leaves you with only one retirement plan to keep track of. But evaluate the new plan’s investment options.

3. Roll over to an IRA. If you participate in a new employer’s plan, this will require keeping track of two plans. But it may be the best alternative because IRAs offer nearly unlimited investment choices.

There are additional issues to consider when deciding what to do with your old retirement plan. We can help you make an informed decision — and avoid potential tax traps.

The passing of Memorial Day marks the beginning of summer in the minds of many Americans. Although the kids might still be in school for another week or two, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax break?

Day camp is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2014, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.

Be aware, however, that overnight camp costs don’t qualify for the credit.

Additional rules apply, so please contact us to determine whether you’re eligible.

If you’re considering donating a property to charity, here are three potential tax traps you need to be aware of:

1. If you donate real estate to a public charity, you generally can deduct the property’s fair market value. But if you donate it to a private foundation, your deduction is limited to the lower of fair market value or your cost basis in the property.
2. If the property is subject to a mortgage, you may recognize taxable income for all or a portion of the loan’s value. And charities might not accept mortgaged property because it may trigger unrelated business income tax for them.
3. If the charity sells the property within three years, it must report the sale to the IRS. If the price is substantially less than the amount you claimed, the IRS may challenge your deduction.

These are only some of the traps that could reduce the tax benefit of your real estate donation. Please contact us to help ensure that you avoid these and other traps.

Health care Flexible Spending Accounts (FSAs) allow employees to redirect pretax income to an employer-sponsored plan that pays, or reimburses them for, qualified medical expenses not covered by insurance. A maximum employee contribution limit of $2,500 went into effect in 2013. (Employers can set a lower limit, however, and there will continue to be no limit on employer contributions to FSAs.)

Employers that haven’t yet done so must amend their plans and summary plan descriptions to reflect the $2,500 limit (or a lower one, if they wish) by Dec. 31, 2014.

While you’re making those amendments, you may want to consider another amendment: allowing a $500 rollover.

Generally, an employee loses any FSA amount that hasn’t been used by the plan year’s end. But last year the IRS issued guidance permitting employers to amend their FSA plans to allow up to $500 to be rolled over to the next year. However, if your plan was previously amended to allow a 2½-month grace period for incurring expenses to use up the previous year’s contribution, you cannot add the rollover provision unless you eliminate the grace period provision.

Questions about amending your FSA plan — or adding FSAs to your benefits offering? Then contact us; we’d be pleased to answer these and other questions related to taxes and employee benefits.

Are you thinking about turning a business trip into a family vacation this summer? This can be a great way to fund a portion of your vacation costs. But if you’re not careful, you could lose the tax benefits of business travel.

Generally, if the primary purpose of your trip is business, then expenses directly attributable to business will be deductible (or excludable from your taxable income if your employer is paying the expenses or reimbursing you through an accountable plan). Reasonable and necessary travel expenses generally include:

• Air, taxi and rail fares,
• Baggage handling,
• Car use or rental,
• Lodging,
• Meals, and
• Tips.

Expenses associated with taking extra days for sightseeing, relaxation or other personal activities generally aren’t deductible. Nor is the cost of your spouse or children traveling with you. During your trip it’s critical to carefully document your business vs. personal expenses. Also keep in mind that special limitations apply to foreign travel, luxury water travel and certain convention expenses.

For more information on how to maximize your tax savings when combining business travel with a vacation, please contact us. In some cases you may be able to deduct expenses that you might not think would be deductible.