Most employee benefit plans with 100 or more participants are required to have an annual audit under the Employee Retirement Income Security Act (ERISA).  While employers tend to view these audits skeptically – after all, they cost money, keep your staff tied up with non-essential tasks, and don’t directly add to the bottomline – they can actually be an excellent opportunity to do some fine-tuning that will help your business run more smoothly. 

ERISA audits are performed by private CPA firms, not by government employees.  Recent changes in auditing standards in the U.S.require auditors to have an in-depth understanding of a client’s business, business environment, operation, and internal controls.  This means that as auditors work with a variety of companies within an industry, they develop a unique understanding of industry practices and benchmarks. 

Business owners can take advantage of this expertise.  Ask the auditor what he or she would do to improve your accounting practices, payroll system, and internal controls.  Implementing these recommendations will not only make next year’s audit go that much faster, it will also enable you to have a more accurate picture of your company’s financial health throughout the year.

For more information on ERISA audits, please contact us.

Roth IRAs have several advantages over a traditional IRA: you are not required to take minimum distributions at any time; when you take qualified distributions, you don’t pay tax on the earnings; and if you need emergency funds before retirement, you can withdraw your contributions (but not earnings) without penalty. 

The benefits are so substantial that for most taxpayers they outweigh the cost of converting a traditional IRA to a Roth.  (Because traditional IRA contributions are made with pre-tax dollars, taxpayers converting their accounts must report the amount of those contributions as income in the year of the conversion and pay tax on the additional income.) 

That option hasn’t been available to taxpayers with an adjusted gross income over $100,000.  In fact, direct contributions to Roth IRAs are not available at all to taxpayers over specified income levels (depending on filing status).

But starting in 2010, high-income individuals will be able to convert a traditional IRA to a Roth. For accounts converted in 2010 only, the amount of the untaxed contributions can be reported as income over the next two years.  For accounts converted after 2010, the untaxed contributions must be reported as income in the year the conversion occurs. 

The expansion of Roth IRA conversions to higher-income taxpayers effectively means that these individuals can avoid the income limit on contributing to a Roth IRA.  Instead, you can make contributions to a traditional IRA account, and then immediately convert it to a Roth. 

In some circumstances the conversion may be tax-free.  However, if you hold a mixture of taxable and non-taxable traditional IRA accounts the conversion may result in a higher-than-expected tax bill. 

Even when the new rules go into effect, determining the most tax-advantageous way to contribute to your IRA will remain a complex endeavor.  Contact us, and we can help you analyze your situation and recommend the best course of action.

On November 6, President Obama signed the Worker, Homeownership and Business Assistance Act of 2009.  This law expands the first-time homebuyer tax credit, so if you couldn’t take advantage of that credit the first time around, you may now be able to do so.  Here are quick highlights of the major changes:

• It extends the program into the first half of 2010.  For purchases in 2010, the credit can be claimed on either the 2009 or 2010 return.
• It raises the income eligibility limits so that more taxpayers can qualify.
• It expands the program to long-time homeowners who are purchasing a replacement home, with certain restrictions.

Full details on the credit are available at the IRS Web site, or you can contact your Anderson ZurMuehlen tax professional for assistance in determining whether you qualify for the credit.

With the fall weather upon us, it won’t be long before we close the books on another year!  It occurred to me that a quick refresher on a few year-end issues regarding S Corporations could help make things go a little smoother at tax time. 

Now is a good time to review the items below and make any necessary adjustments, because once the holiday season kicks in, all bets are off! 

Shareholder Distribution – Distributions in an S Corp must be made in proportion to shareholder ownership interests.  Let’s say there’s a company with two shareholders: A owns 75 percent of the shares and B owns 25 percent.  Since A owns three times as many shares as B does, the total distributions over the course of the year must be made in that same three-to-one ratio. 

This rule applies whether distributions are in cash or property. If A receives a distribution in the form of an old company car with a fair market value of $100, then B must receive a distribution either in cash or property with a fair market value of $33.  Also, keep in mind that if the company pays a non-business expense to one of the shareholders (gym membership, for example), this is a “deemed distribution” requiring a proportionate distribution to the other shareholder(s). 

Now is a good time to review the corporation’s shareholder distributions for the year and determine whether any additional distributions are required to make the appropriate proportions. 

Additional Wages – There are several corporate expenditures that must be included in (some) employees’ wages that are often overlooked.  You can spare these employees a nasty surprise at tax time by letting them know soon how much additional income will be included on their W-2, while they still have an opportunity to adjust withholding or do other planning of their own to avoid penalties for underpayment of taxes. 

• Health Insurance Premiums – If the corporation pays health insurance premiums for an employee who also owns more than 2 percent of the shares, the amount of the premiums must be reported as additional wages in box 1 on the shareholder’s W-2 and denoted as shareholder health insurance in box 14 of the W-2. The corporation should report these premiums as part of compensation expense. Note: this item frequently goes unreported on shareholder W-2’s. The recently issued IRS Notice 2008-2 provides additional information and examples on the subject. For employees who own less than 2 percent of the shares, there is no need to include health insurance premiums in the shareholder’s wages.  The corporation reports these amounts as an ordinary employee benefit expense.
• Life Insurance – Group term life insurance premiums paid by the company for an employee who owns more than 2 percent of the shares must be reported as additional wages on the shareholder’s W-2. For employees who own less than 2 percent of the shares, up to $50,000 in coverage is excludable as income to the employee.  For each $1,000 of coverage in excess of the $50,000, the employer must include a certain amount in the employee’s income.  IRS publication 15-B “Employers Tax Guide to Fringe Benefits” provides more information and a table for calculating the additional income that must be included in the employee’s wages.
• Personal Use of Auto – If the S-Corp allows an employee to use a company vehicle for personal use, the value of that usage has to be included as part of the employee’s income.  However, if the automobile is used only for business purposes, it’s considered a Working Condition Fringe Benefit and is not income to the employee.  This exclusion applies to all shareholders, even those owning more than 2 percent of shares as they are considered employees under the law governing this “benefit.” 

Taking care of these items now will hopefully make your year-end a little more merry!

In an earlier post, one of my colleagues wrote about the importance of good record-keeping and what exactly you should keep. 

In the best of all possible worlds, those records would sit undisturbed in a file drawer or on a shelf, waiting patiently until the time comes when you can finally dispose of them.  But these days, you may find they’re in greater demand.  This is especially true if you are a member in a limited liability company (LLC).  

As interest rates came down earlier this year, many people found it advantageous to lock in a lower rate by refinancing.  The mortgage industry, though, is starting to learn the lesson of all those freewheeling low-doc/no-doc loans, and lenders are being much more rigorous in asking for income documentation.

Traditionally, lenders (at least the ones that bothered with documentation) wanted to see last year’s tax return and W-2s to verify a borrower’s income.  What I’ve noticed recently, with clients who have income from an LLC, is that the lender also wanted to see the K-1s from the LLC and sometimes the full return.  This has happened even when the borrower had employment income (not from the LLC) sufficient to qualify for the loan.

Moral of the story: keep those records filed away where you can find them if you need to.

If you’ve been waiting for the right time (tax-wise) to add more insulation to your home, replace single-pane windows, or make other improvements to keep you and your family a little warmer this winter, now is the time to do it.  After letting the energy-efficiency tax credit lapse in 2008, Congress brought the credit back for 2009 and 2010.

Qualifying improvements include installing energy efficient windows and doors, roofing, insulation, certain heating and cooling systems and water heaters.  The credit is equal to 30 percent of the cost with a maximum credit of $1,500 over those two years.  (In other words, if you make some improvements in 2009 and some in 2010, the total credit you can claim is $1,500 – not $3,000.)  For “building envelope components” such as insulation, windows, skylights, doors, and roofs, the credit does not include the cost of installation.  Still, if you’ve priced windows or a new roof recently, it’s not hard to imagine spending enough on the materials alone to take full advantage of the credit.

Improvements must be made to an existing house located in the United States, and the house must be used as your principal residence – not a vacation or rental property. In addition, if you add solar panels, solar hot water, or certain other energy-generating systems to a new or existing home, you can receive a tax credit of 30 percent of the cost, with no upper limit, through 2016.

Because this is a tax credit – as opposed to a deduction – you will see a dollar-for-dollar decrease in the amount of tax you owe.  In addition, you do not need to itemize in order to take advantage of the credit.

For more information on the tax credit and to see what products qualify for the credit, check out Energystar.gov.