News and Events

New Tax Laws Affecting All Partnerships Starting January 1, 2018

While much of the recent news has focused on the proposed tax reform currently making its way through Congress, there are new mandatory laws affecting all partnerships starting in January 2018.

What is changing?

As you are aware, a partnership is a “flow-through” entity. In other words, the income from a partnership flows through to the individual partners, and they pay tax on the income.  Therefore, there is no tax assessed at the partner level. Under current (soon-to-be-old) law, in an examination, the IRS is required to keep each partner’s liability for partnership operations separate. This most often resulted in many, if not all, of the individual partner’s returns being examined as well.

In these new laws, Congress intended to make a streamlined, efficient system to examine partnerships and collect accessed deficiencies from them. As a result, the IRS may now collect tax at the partnership level as a result of an audit. The IRS will no longer need to keep track of individual partner’s tax liability.

While this sounds like an administrative home run, unfortunately, there are a few hidden issues with the new law.

Potential Pitfalls

First and foremost, the tax assessed to the partnership will be assessed at the highest income tax rate applicable. With the pending House bill, that would retain the 39.6% rate for individual taxpayers with over $1M in taxable income. The current Senate version has a top rate of 38.5% for individual taxpayers with over $1M in taxable income. Obviously, most owners of partnerships do not fall into these tax brackets. Therefore, settling deficiencies in examination at the partnership level will most likely be very costly.

Second, under the new law, any new partners to partnerships could pay tax on additional income assessed for when they were not a partner.  Since the tax deficiency is assessed at the partnership level as it exists at the time of assessment, current partners only will be burdened by that tax.

New Partnership Representative Must Be Designated

In addition to the above, the new law mandates all partnerships must designate a “partnership representative.”  This representative has very broad, and very powerful, responsibilities. A partnership representative does not need to be a partner in the partnership.  While an entity can be assigned as a representative, an individual must still be appointed to act on that entity’s behalf. This representative will have the power to bind the partnership and the individual partners.  Also, neither the IRS nor the partnership representative are required to notify the partners of partnership matters, including an examination. The representative will have ultimate authority with the IRS. If the partnership does not elect a partnership representative, the IRS will have the authority to designate one.

Potential to Elect Out

Certain eligible partnerships can decide annually if they wish to elect out of the new laws. If the partnership elects out of the new treatment, essentially, each partner will be responsible for his or her share of any deficiency assessed. If a partnership does not expressly elect out of the treatment on a timely filed tax return, it is required to conform to the new laws.

The elect out decision, if available, will obviously be made based on individual facts and circumstances. However, as a rule, partnerships with a smaller number of partners will want to strongly consider electing out. For example, a partnership with only four partners may want to elect out and most likely pay less tax on any deficiency assessed. Those four partners may be willing to tolerate the administrative burden.  However, a partnership with 50 partners may find it easier and less costly to pay the tax at the partnership level as opposed to each partner undergoing an audit.

What You Need to Do Immediately

All partnerships need to evaluate and amend their partnership agreement. Questions to be addressed in the agreement include:

  • Who appoints or removes the partnership representative?
  • What procedures should be implemented to limit the partnership representative’s authority within the partnership (i.e., establish a voting committee)?
  • When should the partnership representative give written notice to all of the partners in the case of certain events (audit notices, elections, )?
  • To what extent should the partnership representative exercise due diligence with respect to elections available?
  • Who is responsible for determining whether to elect out annually?
  • Should partners be precluded from transferring their interests in the partnership to ineligible partners?
  • If the partnership unintentionally fails one of the electing out criteria, what is the outcome?
  • Must partners who left the partnership reimburse the partnership for amounts owed for audit years in which they were partners?
  • Should new partners have to pay taxes related to a tax year they were not partners?
  • How to true-up partners when inequities exist among the partners as a result of paying the tax on the partnership level vs. the individual level.
  • How to fund the payment (i.e., partner capital contributions, cash reserve, financing, )
  • Should the Partnership Representative make a “push out” election if available?

As you can see, there are quite a few fiduciary responsibilities and duties of the partnership representative. Without guidance in the partnership agreement, the representative is at risk for a number of potential “self-interest” accusations and lawsuits. Such representatives should carefully consider an indemnification agreement if they decide to serve as a representative.

We encourage you to have a conversation with us as soon as possible to start addressing some of these issues in your partnership agreement. As always, we will help guide you through the implementation of these new regulations and work to put you in the best position possible in the event of an exam. Contact us online or call 215-723-4881.

Canon Capital is Hiring: Staff Accountant

We are currently seeking a Staff Accountant. If you have a minimum of 3 years experience in a CPA firm, have substantial experience with QuickBooks and are a CPA or working towards your CPA designation, this could be the job for you! Learn more and apply here.

UPDATE: This position has been filled. Many thanks to all who applied.

Your Priorities Are Our Priorities

“You are not a priority.” As a small business owner who is seeking to grow your customer base and serve your current customers well, we expect you would never dream of saying this to your customers. It is certainly not our practice to respond this way when a client asks for our assistance. And yet, many of us have had an experience in business where that message is communicated, if not by words then through the type of service provided (or not provided).

This year we are celebrating 30 years of striving to provide our customers with excellent service. Our entire team is committed to helping you grow your business and preserve your wealth. This is not to say we are the only perfect business around, no, no one is perfect. Everyone makes mistakes. So, what sets us apart as a service provider? The way we provide our service, with honesty, integrity, and care. We care about our clients and that is evident in how we go about our daily activities.

We listen.
Have you ever contacted a company with a simple question, one that required a “yes” or “no” answer and instead were directed to the FAQ page of their website? We have, and we didn’t like how that felt. We listen to your concerns and do our best to provide the best possible customer experience.

We get answers.
We’ve all been there. You call a company with a question. After waiting on hold for an inordinate amount of time, the person who takes the call doesn’t have the answer you’re seeking. You get bounced to a few more representatives before getting the answer you need. Not here. With four business units to serve you, we will likely have the answer to your question. If we do not, we will take the time to research it and contact you.

We follow up.
You won’t get lost in the shuffle at Canon Capital. When you decide to start a business relationship with us, but perhaps won’t be ready to fully engage right away, that’s fine. We will make a note to follow up within your desired timeframe, at your convenience.

We care.
We’ve built our business on relationships built on mutual trust and respect, qualities that extend to how we treat our clients. This is not a special initiative; this is our normal way of doing business. We treat you the way we would like to be treated. You are our priority.

If you’re in need of accounting, payroll, IT/computer solutions, or wealth management services and are seeking a company that will look out for you, contact us. We’d love to talk about how we can be of service.

The Equifax Data Breach: What Does It Mean for You?

It appears we hear of new data breaches every day. From Arby’s to Saks Fifth Avenue, in 2017 alone there were 27 before the recent breach at Equifax. What differentiates Equifax from the other entities is that Equifax is one of the three largest credit agencies in the U.S. It is unsettling, to say the least, but there are steps you can take to protect your information:

Check to see if your information was compromised.

Equifax has set up a site dedicated to helping consumers determine if the breach has put their information at risk — www.equifaxsecurity2017.com — and is offering all consumers one free year of their TrustedID Premier program. They have also clarified the language in the terms of use that led to confusion regarding consumers’ right to file suit against Equifax with acceptance of this free service:

“The arbitration clause and class action waiver included in the TrustedID Premier Terms of Use apply to the free credit file monitoring and identity theft protection products, and not the cybersecurity incident.”

Always closely monitor your credit card statements.

If your information was compromised, call your credit card companies and inquire as to whether they recommend changing account numbers and/or issuing new cards.

Review your credit report.

AnnualCreditReport.com provides one free credit report per year.

Consider freezing your credit

The Federal Trade Commission has provided these guidelines regarding a credit freeze. A credit freeze does not:

  • Prevent you from getting your free annual credit report.
  • Keep you from opening a new account, applying for a job, renting an apartment, or buying insurance. However, if you are doing any of these, you will need to lift the freeze temporarily, either for a specific time or a specific party, say, a potential landlord or employer. The cost and lead times to lift a freeze vary, so it is best to check with the credit reporting company in advance.
  • Prevent a thief from making charges to your existing accounts. You still need to monitor all bank, credit card and insurance statements for fraudulent transactions.

Equifax is currently waiving their credit freeze fee. Each of the three credit reporting agencies – Equifax, Experian, and TransUnion – charge between $5-$10.

The Nuclear Option

If you do find yourself affected by this data breach to the point of identity theft or other life-altering implications, you can file for a new Social Security Number.

There is nothing pleasant about any of these activities but please take a moment and do your due diligence for your protection. We are also available if you have any questions. Please don’t hesitate to contact us.

 

Lease or Buy? Sell or Trade In? Business Vehicle Wisdom from Canon Capital Accounting Services

car inventory colorful
It’s time. Whether it’s one too many repair bills or the need for updated equipment, if you use your car for your business or have vehicles for specific use in your business the day will come when you’ll need to replace it. Deciding whether to trade it in or to try to sell it for cash will likely be based on the amount you can get on a sale versus a trade-in, not to mention the time you will spend.

There are also important tax factors to consider as you weigh your options. Here’s a quick overview of the complex tax rules that apply to what appears to be a simple transaction, and some pointers on how to achieve the best tax results.

Overall, the sale of a business asset yields a gain or loss depending on the net amount you receive from the sale and your basis for it. “Basis” is your “cost” for tax purposes, and, if you bought the asset, it usually equals your cost less the depreciation deductions you claimed for the asset over the years. Under the tax-free swap rules, trading in an old business asset for a new, like-kind asset doesn’t result in a current gain or loss, and the new asset’s basis will equal the old asset’s remaining basis plus any cash you paid to trade up. The rules generally are the same for business vehicles, with a couple of extra twists. So, what’s best for you?

Trade in your old business vehicle if:

  • The vehicle was used exclusively for business driving.
  • The vehicle’s basis has been depreciated down to zero or is very low.

The trade-in process often avoids a current tax. For example, if you sell your business vehicle for $9,000, and your basis in it is only $7,000, you will have a $2,000 taxable gain. If instead, you trade it in, a current tax is avoided. The trade-in means that the basis in the new vehicle will be lower than it would be if you bought it without a trade-in, but that doesn’t necessarily mean lower depreciation deductions on the new vehicle. Thanks to the “luxury auto” annual depreciation dollar caps, when purchasing a car for business your annual depreciation deductions on the new car may be the same whether you sold the old car or traded it in.

Consider selling your old business vehicle for cash if:

  • You used it exclusively for business driving and depreciation on the old vehicle was limited by the annual depreciation dollar caps.

In this situation, your basis in the old vehicle may exceed its value. If you sell the old vehicle, you will recognize a loss for tax purposes. However, if you trade it in, you will not recognize the loss.

Breaking this down, let’s assume a business person bought a $30,000 car several years ago and used it 100% for business driving. Because of the annual depreciation dollar caps, there is still a $16,000 basis in the car, which has a current value of $14,500. When this person wants to buy another $30,000 car, if the old vehicle is sold, a $1,500 loss will be recognized ($16,000 basis less $14,500 sale price). If the old vehicle is traded in for a new one, there will be no current loss. Again, if the old vehicle’s value exceeds its basis, the smart move on the taxation front is to trade it in, avoiding a gain.

  • You used the standard mileage allowance to deduct car-related expenses.

The 2016 allowance is 54¢ per business mile driven; For 2017, the allowance is 53.5¢ per business mile driven. The standard mileage allowance has a built-in allowance for depreciation, which must be reflected in the basis of the car. The deemed depreciation is 24¢ for every business mile traveled during 2016, and 25¢ for every business mile traveled in 2017. When you decide it’s time to make a change, the depreciation allowance may leave you with a higher remaining basis than the vehicle’s value. Under these circumstances, the vehicle should be sold to recognize the loss.

Did you use your vehicle partially for business, partially for personal use?

The rules are more complicated in this situation, which mainly applies to people who are self-employed, or as an employee are required to supply a vehicle for business use. In these instances:

  • If you sell the vehicle, cost and depreciation must be allocated between the business and personal portions. Gain or loss on the business part is recognized; gain, but not loss, is recognized on the personal part.
  • If you choose to trade it in, a special basis rule applies for depreciation purposes only. The basis of the new vehicle as computed under the normal trade-in rules is reduced by any difference between the depreciation that would have been allowable had the vehicle been used 100% for business driving and the depreciation claimed for its actual business use.

Leasing a Business Vehicle

The complex rules that apply to purchased business vehicles are one reason many business owners choose leasing vehicles over buying. When leasing, you simply deduct the business/investment use portion of annual lease costs. If the vehicle is a “luxury” model, for each lease year you add back to income an income inclusion amount derived from an IRS table. According to guidelines for 2016 and 2017, a leased vehicle is deemed “luxury” if the vehicle’s fair market value exceeds $19,000 ($19,500 for certain trucks and vans). There are, however, a few aspects of leasing to be aware of:

  • If you pay an additional sum up-front, it should be amortized over the life of the lease.
  • Any refundable deposit required as part of the lease deal cannot be deducted at all.

If you’re thinking, “This all sounds so very complicated,” you’re right. Before taking that next step with regard to your business vehicle, whether selling, trading in, or leasing, please contact us to set up a meeting to discuss the best path for your specific situation.

Deadline for Employers to Begin Using New Form I-9 is September 18, 2017


Starting September 18, 2017 employers will be required by United States Citizenship and Immigration Services (USCIS) to use the recently-updated form I-9. Also known as the Employment Eligibility Verification form, this new version can be found on the USCIS website along with instructions for use.

This update of the I-9 form is mainly semantic, with another updated expected in March 2018. Full details on the current update are available here.

We are here to help if you have any questions about this update or any payroll concerns. Please don’t hesitate to contact us.

Hurricane Harvey Recovery: IRS Grants Temporary Relief on Hardship and Loan Distributions from Employer-sponsored Retirement Plans

hurricane
Hurricane Harvey has unleashed devastation beyond comprehension. It’s been encouraging to see our fellow citizens working together to lend a hand and we continue to keep those affected in our thoughts and prayers. As of August 30, 2017, we can also add the IRS to that list of helpers, with the announcement that they will extend hardship and loan distribution relief to employees with employer-sponsored retirement plans:

Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.

If you have family, friends, or colleagues in the affected areas, please share this information with them. We are also happy to answer questions. Contact us online or call 215-723-4881.

Canon Capital Wealth Management Recognized for Ten Years of Fiduciary Excellence by CEFEX

Pictured L-R: Blaine F. Aikin, Executive Chairman, Fi360; Patricia Webb, Owner and Director, Canon Capital Wealth Management Services; Carlos Panksep, General Manager, CEFEX

We are honored to announce that Canon Capital Wealth Management was recently recognized for achieving ten years of certified excellence in fiduciary-based investment practices as established by CEFEX (Centre for Fiduciary Excellence).

CEFEX is an independent global assessment and certification organization, working closely with investment fiduciaries and industry experts to provide comprehensive assessment programs to improve risk management for institutional and retail investors. CEFEX certification helps determine the trustworthiness of investment fiduciaries, providing an independent recognition of a firm’s conformity to a defined Standard of Practice. It implies that a firm can demonstrate adherence to the industry’s best practices, and is positioned to earn the public’s trust.

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Canon Capital Computer Solutions Named Calyptix Security Corp. 2017 Premier Partner

Cybersecurity. In today’s digital landscape, it’s more important than ever. The need for vigilance in protecting your small business from a cyber attack increases every day.

We take this work of protecting your network very seriously. That’s why we’re proud to announce our designation as a 2017 Premier Partner by Calyptix Security Corp. This means that Canon Capital Computer Solutions has met the criteria of a commitment to superior IT support and services to our customers and for accelerating growth in network security services for the small and medium businesses we serve.

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