Take a penalty-free IRA withdrawal for medical expenses

Are you considering withdrawing funds from your traditional IRA to pay unexpected medical costs?

You may be hesitating because of the 10% penalty imposed on withdrawals made when you're under age 59½. Since the 10% is calculated on the total you withdraw, the tax hit could be substantial. Worse, the penalty typically is not withheld from the cash you receive, so you'll need to come up with the money when you file your tax return.

Fortunately, in some situations you can take penalty-free withdrawals from your IRA for medical expenses.

One example is the medical insurance exception, which applies if you lost your job and have received unemployment compensation for 12 consecutive weeks. IRA withdrawals used to pay medical insurance premiums for yourself, your spouse, or your dependents aren't subject to the 10% penalty, as long as you take the distributions in the year you receive unemployment (or the year after).

 

This exception may also be available if you were self-employed and are unable to collect unemployment benefits.

Another exception: You can take penalty-free withdrawals when you incur unreimbursed medical expenses that exceed 10% of your gross income. For instance, say your 2014 gross income is $40,000 and your total unreimbursed deductible medical expenses are $5,000. To determine the penalty-free withdrawal amount of $1,000, multiply $40,000 by 10%, then subtract the result ($4,000) from $5,000.

You don't have to itemize your deductions to qualify for this exception.

In addition, the penalty does not apply when early IRA withdrawals are due to a permanent, total disability.

For more information about the requirements for these and other exceptions to the 10% early withdrawal penalty, please contact us.

Every small business should establish controls

Every week reporters publish stories about companies that have lost thousands, even millions of dollars because of fraud. They recount the dreadful details of business owners who learned – too late – that a lack of basic controls left their companies vulnerable to pilferage, embezzlement, and other types of misappropriation.

How do these lessons apply to small businesses? After all, small firms generally can't afford to hire internal auditors or set up separate divisions to break up incompatible duties. While it's true that a small company can't always protect itself in ways larger firms might, management can establish controls in certain high-risk areas, such as the following:

Cash disbursements. If at all possible, the owner/manager should sign checks. This control has a dual purpose: management sees how the company is spending its money, and the cash disbursement function is kept separate from bookkeeping or accounting. If the same person signs checks and enters disbursement transactions in the accounting records, embezzlement is harder to prevent. Requiring two signatures on checks above a certain amount also provides greater control.

Customer collections. Consider having the owner/manager open the mail, especially if customer collections are a regular part of your business. Alternatively, you might ask someone separate from the accounting function to open the mail and prepare the deposit slip. Of course, the practice of making daily deposits is also a good control.

Personnel practices. By taking care to perform background checks before hiring key employees, especially those who will be handling cash or other high-risk assets, you can prevent problems later on. Of course, financial pressures, addictions, and other factors can corrupt even good employees. That's why managers might consider discreetly monitoring employee lifestyles (without invading anyone's privacy, of course). An observant manager might note that certain lower-level employees are living well beyond their means, or that warehouse staff are carrying off company materials to remodel personal residences.

Perhaps a small business's greatest control is the "tone at the top." If management sets a high standard, employees generally follow. However, if a manager is perceived as lax – for example, he or she doesn't respond quickly when evidence of misappropriation surfaces – employees might conclude that theft isn't such a big deal.

Remember this: A company that fails to establish minimum controls is providing a golden opportunity for fraud. If you'd like help reviewing your firm's controls, give us a call.

Health insurance tax credits are good medicine for small businesses

Small businesses may be missing out on an important new tax perk related to health insurance. And the stakes are even higher in 2014.

The Affordable Care Act provides a tax incentive for small business owners who pay at least a portion of their employees' health insurance. This year as much as 50% (up from 35% in 2013) of the employer's cost for worker health care premiums can be deducted as a tax credit. That's a dollar-for-dollar reduction in your 2014 tax bill. But as with most tax deals, you must meet certain requirements to qualify.

 

First, you must employ fewer than 25 full-time equivalent (FTE) employees. A half-time employee would count as a .5 FTE, so you must consider all workers in your calculation. The fewer FTE employees you have, the higher the tax credit percentage.

Second, the average annual wages of your employees must be less than $50,000. To make the calculation, you would take your total wages and divide by the FTE number you figured above. In most cases the owner's salary is not included in the formula.

Finally, the business owner must contribute at least 50% of the total cost for single coverage. Family coverage is not factored in. The policy must also be purchased through the Small Business Health Options Program, or SHOP to be eligible for the credit.

A few more wrinkles: if a business doesn't owe tax for the current year, they can apply the credit to past or future years. In addition, the excess of the employer's actual cost of health insurance over and above the credit received can still be deducted as a business expense. And the new rules also mean that small nonprofit organizations can receive a tax credit of up to 35% of their health insurance costs if they meet the above requirements.

Who needs an "Employer Identification Number"?

If you do any of the following, you will need an Employer Identification Number (EIN) from the IRS:

If you operate your business as a corporation or partnership.

If you file reports for employment taxes, excise tax, or alcohol, tobacco and firearms.

If you have even one employee.

If you have a self-employed retirement plan.

If you operate as any of several other organizations.

Acquiring an EIN is very quick and simple. You do not need to complete the Form SS-4 unless you prefer to. Go to www.irs.gov. Once there, use the search box and type in EIN online. You will be taken to the page that allows you to answer questions online and you will get your EIN upon validation of your answers. You will be able to download and print your confirmation notice.

If you need assistance, please contact our office. We are here to help you.

Rule for deducting medical expenses has changed

You may be familiar with the old tax rule that let you take an itemized deduction for unreimbursed medical expenses that exceeded 7½% of your adjusted gross income. For 2013 and future years, the income threshold increases to 10% for taxpayers under age 65. Those 65 and older may continue to use the 7½% threshold through the year 2016.

Take a different route to a Roth IRA

If your income exceeds certain levels, you cannot make contributions to a Roth IRA. However, you can convert a traditional IRA to a Roth IRA no matter how high your income. Roth IRAs are popular because qualifying distributions are tax-free and annual distributions are not required at age 70½. A conversion to a Roth is a taxable event, so factor that into your analysis. For more information, call us.

Take your choice for deducting home office expenses

You now have a choice in how you deduct the expense of a home office. Starting with your 2013 tax return, you can either deduct the actual expenses connected with your home office, or you can use the simplified method of deducting $5 per square foot of the part of your home used for business, up to a maximum deduction of $1,500.

Remember, the deduction isn't available just because you do work at home; you must use part of your home regularly and exclusively as your principal place of business or where you meet customers, clients, or patients in the normal course of business.

Equipment write-off decreases for 2014

In recent years, businesses could expense up to $500,000 of equipment purchases in the year of purchase, with a $2,000,000 annual purchase limit. In addition, bonus depreciation was allowed for new equipment purchases.

Because Congress did not extend these provisions for 2014, businesses can now only expense $25,000 of new or used equipment purchases. The deduction is reduced dollar-for-dollar when total asset purchases for 2014 exceed $200,000. Also, the 50% bonus depreciation that applied in 2013 is no longer available.

Congress may extend these provisions, or they may not. Check with us for the latest when you're making equipment purchasing decisions this year.

Capitalization vs. expensing

The new IRS regulations on capitalization vs expensing are complex. But the part of the regulations that concerns most small businesses makes it easier for them to comply.

Here's an overview of the safe harbor rules for small businesses. If your average annual gross sales are $10 million or less, you may choose to write off the cost of improvements made to an "eligible building." An "eligible building" is one that is owned or leased by the qualifying taxpayer and the unadjusted basis of the building is $1,000,000 or less. Also, to be able to deduct the expenditures on your current-year's tax return, the yearly total paid for repairs, maintenance, and improvements cannot exceed the lesser of $10,000 or 2% of the building's unadjusted basis.

As with any part of the tax law, there are many details to be followed for the best tax treatment. Please contact us if you would like more information on these new tax regulations.

IRS alerts taxpayers to latest tax scam

The IRS has issued a warning about the latest phone scam. The caller claims to be from the IRS and tells the intended victims they owe taxes which must be paid immediately with a pre-paid debit card or wire transfer. Individuals who don't pay up are threatened with arrest or loss of their business or driver's license.

Watch for these signs that the call is a scam:

Use of fake IRS badge numbers.

Caller knows the last four digits of your social security number.

Caller ID appears as if IRS is calling.

Bogus IRS e-mail is sent as follow-up.

Second call claims to be from police or DMV, again supported by fraudulent caller ID.

Don't respond in any way to these scams; instead forward the scam e-mail to phishing@irs.gov, or file a complaint at FTC.gov.