A significant law was recently passed that adds tax breaks and makes changes to employer-provided retirement plans. If your small business has a current plan for employees or if you’re thinking about adding one, you should familiarize yourself with the new rules.
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law on December 20, 2019 as part of a larger spending bill. Here are three provisions of interest to small businesses.
- Employers that are unrelated will be able to join together to create one retirement plan. Beginning in 2021, new rules will make it easier to create and maintain a multiple employer plan (MEP). A MEP is a single plan operated by two or more unrelated employers. But there were barriers that made it difficult to setting up and running these plans. Soon, there will be increased opportunities for small employers to join together to receive better investment results, while allowing for less expensive and more efficient management services.
- There’s an increased tax credit for small employer retirement plan startup costs. If you want to set up a retirement plan, but haven’t gotten around to it yet, new rules increase the tax credit for retirement plan start-up costs to make it more affordable for small businesses to set them up. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit to: The greater of $500, or the lesser of: a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or b) $5,000.
- There’s a new small employer automatic plan enrollment tax credit. Not surprisingly, when employers automatically enroll employees in retirement plans, there is more participation and higher retirement savings. Beginning in 2020, there’s a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. This credit is on top of an existing plan start-up credit described above and is available for three years. It is also available to employers who convert an existing plan to a plan with automatic enrollment.
These are only some of the retirement plan provisions in the SECURE Act. There have also been changes to the auto enrollment safe harbor cap, nondiscrimination rules, new rules that allow certain part-timers to participate in 401(k) plans, increased penalties for failing to file retirement plan returns and more. Contact us to learn more about your situation.
In 2018, businesses reported losing over $7 billion dollars to fraud schemes. Small businesses reported losing a median $200,000 due to fraud, while businesses with more than 100 employees reported $104,000 in loses due to fraud. This presents a big issue when it comes to small businesses and what can be done to prevent becoming a victim to fraud. This article will delve into what a fraudster looks like, the reasoning behind committing fraud, common frauds plaguing small businesses and prevention methods that could be put into place for a small business owner.
So, what does a fraudster look like you may ask? There is no way to answer that question because fraudsters take many forms. Fraud can be committed by your most trusted employee, your best friend, and even a relative. The fraud triangle is a tool used by many forensic accountants to determine why someone commits fraud. There are three elements that must be met for a fraud to occur. The first element that must be met is perceived unshareable financial need on the part of the fraudster. This could be unexpected medical bills, car maintenance, or simply just living paycheck to paycheck. The next element that must exist is perceived opportunity. This means that an employee feels that he or she can reasonably commit the fraud and not get caught. And lastly, an employee must be able to rationalize the fraud. This is as simple as saying “the company makes enough money,” or “I don’t get paid enough.” These three elements form the fraud triangle, and have been noted in every fraud case brought to light.
Small businesses encounter many challenges in day-to-day operation. Fraud can easily slip through the cracks. Some of the most common frauds to watch out for are payroll fraud, cash theft, online banking, and fake vendors or invoices. Due to the increasing reliance on technology, paychecks are directly deposited into the employees account without the owner ever signing off. This allows for a payroll preparer to alter his or her pay, click submit, and no one is the wiser. Another fraud plaguing mostly cash businesses is skimming, which is when an employee takes cash paid to the business and puts it directly in their pocket without the owner’s knowledge. This can create a cash flow vs. inventory problem, but it likely won’t be detected until it’s too late. Online banking allows funds to be transferred from the company account to other bank accounts. An employee with access to the bank account can easily send him or herself money from the company account, and without watchful oversight, the transfer would likely go undetected. Lastly, companies should spot check invoices being paid out. Anyone with a computer can put a fake logo on an invoice template and make it seem like a legitimate business expense. Know your vendors and know what products you are actually receiving versus what you are being invoiced for.
Though it may seem impossible for a small business to deter and detect fraud, there are internal controls that can be put in place to ensure that you are not the next victim of the 2,500 plus cases of fraud committed annually. One of the best internal controls in my opinion is the separation of duties. The person that approves invoices to be paid should not be the one writing the check to pay the vendor. Ideally a business should have a third person involved to sign the check before it is sent out. Another internal control is to create a control environment. Basically, promote ethical values and integrity within your business at all times. This could even include a way to discreetly report fraud as 40% of all reported frauds in 2018 were discovered because of an employee tip. A final internal control is an internal audit. Randomly select work done by employees with financial roles within your business to ensure accuracy and that company procedures are being followed.
One of the most important sayings I was taught throughout my tenure at Georgia Southern University (Go Eagles!) is “Trust but verify.” Trust that your employees are being honest and ethical, but verify by setting up internal controls and having appropriate checks and balances within your organization. Although you may think you know and fully trust your employees, you never know what their true ulterior motive may be.
All statistics taken from the 2018 Report to the Nations published by the Association of Certified Fraud Examiners. A copy is available for download at https://www.acfe.com/report-to-the-nations/2018/default.aspx.
T. Chase Matthews
Chase is a Certified Fraud Examiner with KRT, CPAs and is double jointed in his hands and arms.
Here are some key tax-related deadlines affecting businesses and other employers during the first quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. If you have any questions. contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
January 31: File 2019 Forms W-2, “Wage and Tax Statement”, with the Social Security Administration and provide copies to your employees. Provide copies of 2019 Forms 1099-MISC, “Miscellaneous Income”, to recipients of income from your business where required. File 2019 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS. File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return”, for 2019. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return. File Form 941, “Employer’s Quarterly Federal Tax Return”, to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2019. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return”.) File Form 945, “Annual Return of Withheld Federal Income Tax”, for 2019 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
February 28: File 2019 Forms 1099-MISC with the IRS if 1. They’re not required to be filed earlier and 2. You’re filing paper copies. (Otherwise, the filing deadline is March 31.)
March 16: If a calendar-year partnership or S corporation, file or extend your 2019 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2019 contributions to pension and profit-sharing plans
If you’re starting to fret about your 2019 tax bill, there’s good news — you may still have time to reduce your liability. Three strategies are available that may help you cut your taxes before year-end, including:
1. Accelerate deductions/defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2020 payment this month, you can deduct the interest portion on your 2019 tax return (assuming you itemize). Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay your invoices until late in December to divert the revenue to 2020. You shouldn’t pursue this approach if you expect to land in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.
2. Maximize your retirement contributions. What could be better than paying yourself instead of Uncle Sam? Federal tax law encourages individual taxpayers to make the maximum allowable
contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities. For 2019, you generally can contribute as much as $19,000 to 401(k)s and $6,000 for traditional IRAs. Self-employed individuals can contribute up to 25% of your net income (but no more than $56,000) to a SEP IRA.
3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis. If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years. We can help The strategies described above are only a sampling of strategies that may be available.
Contact us if you have questions about these or other methods for minimizing your tax liability for 2019.
As the filing season for tax year 2018 draws to a close with the October 15th extension deadline, taxpayers across the country can breathe a sigh of relief knowing their obligation to Uncle Sam has been satisfied for the year. The 2019 season, however, is just around the corner and the April 15th filing deadline will be here before you know it. The following are just a few different approaches to consider as you start your end-of-year tax planning for 2019 and beyond.
In 2016, former Governor Nathan Deal signed into law a program aimed at “Helping Enhance Access to Rural Treatment” – the Georgia HEART Hospital Program. This program allows Georgia taxpayers to route their tax dollars to an eligible rural hospital of their choice by means of a charitable contribution to the hospital. Through a pre-approval process with the Georgia Department of Revenue, taxpayers can obtain a dollar-for-dollar state tax credit of up to $5,000 ($10,000 for married filing jointly). Essentially, every dollar you contribute to the hospital reduces your state tax liability by the same amount. Donations are capped statewide at $60 million. If the limit is not reached by June 30th of each taxable year, taxpayers can then make unlimited contributions for the remainder of the year until the cap is reached, and claim their contributions fully as a state tax credit. It is important to note that these pre-approved credits have generally been exhausted shortly after the application process begins each year. The application process usually begins in October for the following tax year, which means the application process for 2020 should begin shortly!
For the first year enacted, these credits were also fully deductible as a charitable contribution on Schedule A of the federal tax return. The Tax Cuts and Jobs Act (TCJA), however, would eliminate this federal deduction entirely for Georgia taxpayers once signed into law at the end of 2017. One of the elements of the act limited the deductibility of state and local taxes to a maximum of $10,000. To try to bypass this limit, many states began credit programs similar to the Georgia HEART Hospital Program as a way to afford their taxpayers a federal deduction for state taxes paid, since the charitable contribution would also reduce their state income tax liability. Via regulations effective August 11, 2019 (and applicable to contributions made after August 27, 2018), the US Treasury Department ruled that taxpayers can only deduct the net value of the donation as a charitable contribution. Because Georgia taxpayers receive a 100% tax credit for each dollar contributed, $0 of the donation is deductible on the federal return. This should not dissuade taxpayers from utilizing the credit, however, as it is a good way for you to specifically determine where your tax dollars go to work!
Another element of the TCJA increased the standard deduction for taxpayers, which is $12,200 for single individuals in 2019 and $24,400 for couples filing a joint return. For many individuals, this increase was enough to force them to take the standard deduction rather than itemizing their expenses, as their itemized deductions were far less than these standard amounts. Though the increase is favorable to the federal return, it can be somewhat less beneficial on the Georgia return. Taxpayers who take the standard deduction on the federal return must also take the standard deduction on the Georgia return. This amount is far lower than its federal counterpart: $4,600 for single taxpayers and $6,000 for couples filing jointly. A couple that could previously deduct $20,000 on the federal return and $20,000 on the state return by itemizing would now deduct $24,000 on the federal return and only $6,000 on the Georgia return. Taxpayers may consider bunching certain itemized deductions, such as medical expenses and charitable contributions, into alternating years, if this would push them over the threshold to itemize. Of course, the taxpayer would have to take the standard deduction in the alternate years, but would at least see a greater benefit with these expenses every other year. Through the use of donor-advised funds, taxpayers can make one large donation and take the charitable deduction in the year of contribution, but distribute the funds to one or more organizations over multiple years.
For most taxpayers, bunching medical expenses is not very practical. Though we always hope to live in good health, we cannot always control our medical needs as they arise. Life happens. For this reason, taxpayers may want to consider the use of health savings accounts. Contributions to these accounts (a maximum $3,500 for individuals and $7,000 for families in 2019) are deducted from gross income, a.k.a. pre-tax dollars, and can be used to pay for out-of-pocket medical expenses in the future. Withdrawals for qualified medical expenses are also tax-free and without penalty. However, withdrawals made for expenses other than qualified medical expenses before age 65 are subject to both tax and a 20% penalty. Individuals 65 and older can make withdrawals for expenses other than medical without penalty, but this income is still subject to income tax.
It is never too early to start thinking about tax planning for the future, and your trusty CPA can help! For more information about these and other year-end planning strategies, be sure to contact your tax preparer. For more information on the Georgia HEART Hospital Program, visit www.georgiaheart.org.
Ethan is a licensed CPA with KRT, CPAs and is chock-full of useless pop culture trivia.