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Tax credit for hiring from certain “target groups” can provide substantial tax savings
Many businesses hired in 2017, and more are planning to hire in 2018. If you’re among them and your hires include members of a “target group,” you may be eligible for the Work Opportunity tax credit (WOTC). If you made qualifying hires in 2017 and obtained proper certification, you can claim the WOTC on your 2017 tax return.
Whether or not you’re eligible for 2017, keep the WOTC in mind in your 2018 hiring plans. Despite its proposed elimination under the House’s version of the Tax Cuts and Jobs Act, the credit survived the final version that was signed into law in December, so it’s also available for 2018.
“Target groups,” defined
Target groups include:
Qualified individuals who have been unemployed for 27 weeks or more,
Designated community residents who live in Empowerment Zones or rural renewal counties,
Long-term family assistance recipients,
Qualified ex-felons,
Qualified recipients of Temporary Assistance for Needy Families (TANF),
Qualified veterans,
Summer youth employees,
Supplemental Nutrition Assistance Program (SNAP) recipients,
Supplemental Security Income benefits recipients, and
Vocational rehabilitation referrals for individuals who suffer from an employment handicap resulting from a physical or mental handicap.
Before you can claim the WOTC, you must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you. Unfortunately, this means that, if you hired someone from a target group in 2017 but didn’t obtain the certification, you can’t claim the WOTC on your 2017 return.
A potentially valuable credit
Qualifying employers can claim the WOTC as a general business credit against their income tax. The amount of the credit depends on the:
Target group of the individual hired,
Wages paid to that individual, and
Number of hours that individual worked during the first year of employment.
The maximum credit that can be earned for each member of a target group is generally $2,400 per employee. The credit can be as high as $9,600 for certain veterans.
Employers aren’t subject to a limit on the number of eligible individuals they can hire. In other words, if you hired 10 individuals from target groups that qualify for the $2,400 credit, your total credit would be $24,000.
Remember, credits reduce your tax bill dollar-for-dollar; they don’t just reduce the amount of income subject to tax like deductions do. So that’s $24,000 of actual tax savings.
Offset hiring costs
The WOTC can provide substantial tax savings when you hire qualified new employees, offsetting some of the cost. Contact us for more information.
© 2018
Use benchmarking to swim with the big fish
You may keep a wary eye on your competitors, but sometimes it helps to look just a little bit deeper. Even if you’re a big fish in your pond, someone a little bigger may be swimming up just beneath you. Being successful means not just being aware of these competitors, but also knowing their approaches and results.
And that’s where benchmarking comes in. By comparing your company with the leading competition, you can identify weaknesses in your business processes, set goals to correct these problems and keep a constant eye on how your company is doing. In short, benchmarking can help your company grow more successful.
2 basic methods
The two basic benchmarking methods are:
1. Quantitative benchmarking. This compares performance results in terms of key performance indicators (formulas or ratios) in areas such as production, marketing, sales, market share and overall financials.
2. Qualitative benchmarking. Here you compare operating practices — such as production techniques, quality of products or services, training methods, and morale — without regard to results.
You can break down each of these basic methods into more specific methods, defined by how the comparisons are made. For example, internal benchmarking compares similar operations and disseminates best practices within your organization, while competitive benchmarking compares processes and methods with those of your direct competitors.
Waters, familiar and new
The specifics of any benchmarking effort will very much depend on your company’s industry, size, and product or service selection, as well as the state of your current market. Nonetheless, by watching how others navigate the currents, you can learn to swim faster and more skillfully in familiar waters. And, as your success grows, you may even identify optimal opportunities to plunge into new bodies of water.
For more information on this topic, or other profit-enhancement ideas, please contact our firm. We would welcome the opportunity to help you benchmark your way to greater success.
© 2018
Turning employee ideas into profitable results
Many businesses train employees how to do their jobs and only their jobs. But amazing things can happen when you also teach staff members to actively involve themselves in a profitability process — that is, an ongoing, idea-generating system aimed at adding value to your company’s bottom line.
Let’s take a closer look at how to get your workforce involved in coming up with profitable ideas and then putting those concepts into action.
6 steps to implementation
Without a system to discover ideas that originate from the day-in, day-out activities of your business, you’ll likely miss opportunities to truly maximize profitability. What you want to do is put a process in place for gathering profit-generating ideas, picking out the most actionable ones and then turning those ideas into results. Here are six steps to implementing such a system:
Share responsibility for profitability with your management team.
Instruct managers to challenge their employees to come up with profit-building ideas.
Identify the employee-proposed ideas that will most likely increase sales, maximize profit margins or control expenses.
Tie each chosen idea to measurable financial goals.
Name those accountable for executing each idea.
Implement the ideas through a clear, patient and well-monitored process.
For the profitability process to be effective, it must be practical, logical and understandable. All employees — not just management — should be able to use it to turn ideas and opportunities into bottom-line results. As a bonus, a well-constructed process can improve business skills and enhance morale as employees learn about profit-enhancement strategies, come up with their own ideas and, in some cases, see those concepts turned into reality.
A successful business
Most employees want to not only succeed at their own jobs, but also work for a successful business. A strong profitability process can help make this happen. To learn more about this and other ways to build your company’s bottom line, contact us.
© 2018
Small business owners: A SEP may give you one last 2017 tax and retirement saving opportunity
Are you a high-income small-business owner who doesn’t currently have a tax-advantaged retirement plan set up for yourself? A Simplified Employee Pension (SEP) may be just what you need, and now may be a great time to establish one. A SEP has high contribution limits and is simple to set up. Best of all, there’s still time to establish a SEP for 2017 and make contributions to it that you can deduct on your 2017 income tax return.
2018 deadlines for 2017
A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP is to first apply. That means you can establish a SEP for 2017 in 2018 as long as you do it before your 2017 return filing deadline. You have until the same deadline to make 2017 contributions and still claim a potentially hefty deduction on your 2017 return.
Generally, other types of retirement plans would have to have been established by December 31, 2017, in order for 2017 contributions to be made (though many of these plans do allow 2017 contributions to be made in 2018).
High contribution limits
Contributions to SEPs are discretionary. You can decide how much to contribute each year. But be aware that, if your business has employees other than yourself: 1) Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and 2) employee accounts are immediately 100% vested. The contributions go into SEP-IRAs established for each eligible employee.
For 2017, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction) of up to $270,000, subject to a contribution cap of $54,000. (The 2018 limits are $275,000 and $55,000, respectively.)
Simple to set up
A SEP is established by completing and signing the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). Form 5305-SEP is not filed with the IRS, but it should be maintained as part of the business’s permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.
Additional rules and limits do apply to SEPs, but they’re generally much less onerous than those for other retirement plans. Contact us to learn more about SEPs and how they might reduce your tax bill for 2017 and beyond.
© 2018
Claiming Bonus Depreciation on Your 2017 Tax Return May be Particularly Beneficial
With bonus depreciation, a business can recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Tax Cuts and Jobs Act (TCJA), signed into law in December, enhances bonus depreciation.
Typically, taking this break is beneficial. But in certain situations, your business might save more tax long-term by skipping it. That said, claiming bonus depreciation on your 2017 tax return may be particularly beneficial.
Pre- and post-TCJA
Before TCJA, bonus depreciation was 50% and qualified property included new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified improvement property.
The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.
But be aware that, under the TCJA, beginning in 2018 certain types of businesses may no longer be eligible for bonus depreciation. Examples include real estate businesses and auto dealerships, depending on the specific circumstances.
A good tax strategy • or not?
Generally, if you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation is likely a good tax strategy (though you should also factor in available Section 179 expensing). It will defer tax, which generally is beneficial.
On the other hand, if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax this year, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re paying a higher tax rate.
What to do on your 2017 return
The greater tax-saving power of deductions when rates are higher is why 2017 may be a particularly good year to take bonus depreciation. As you’re probably aware, the TCJA permanently replaces the graduated corporate tax rates of 15% to 35% with a flat corporate rate of 21% beginning with the 2018 tax year. It also reduces most individual rates, which benefits owners of pass-through entities such as S corporations, partnerships and, typically, limited liability companies, for tax years beginning in 2018 through 2025.
If your rate will be lower in 2018, there’s a greater likelihood that taking bonus depreciation for 2017 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years, especially if the asset meets the deadlines for 100% bonus depreciation.
If you’re unsure whether you should take bonus depreciation on your 2017 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.
© 2018
Two Five-Year Tests for Roth IRAs
The pros and cons of Roth IRAs, which were introduced 20 years ago, are well understood. All money flowing into Roth IRAs is after-tax, so there is no upfront tax benefit.
As a tradeoff, all qualified Roth IRA distributions can be tax-free, including the parts of the distributions that are payouts of investment earnings.
To be a qualified distribution, the distribution must meet two basic requirements. First, the distribution must be made on or after the date the account owner reaches age 59½, be made because the account owner is disabled, be made to a beneficiary or to the account owner’s estate after his or her death, or be used to buy or rebuild a first home.
Second, the distribution must be made after the five-year period beginning with the first tax year for which a contribution was made to a Roth IRA set up for the owner’s benefit.
Note that the calculation of a Roth IRA’s five-year period is very generous. It always begins on January 1 of the calendar year.
Example 1: Heidi Walker, age 58, opens her first Roth IRA and makes a contribution to it on March 29, 2018. Heidi designates this as a contribution for 2017, which can be made until April 17, 2018.
Under the five-year rule, Heidi’s five-year period starts on January 1, 2017. As of January 1, 2022, Heidi’s Roth IRA distributions are tax-free, qualified distributions because they will have been made after she turned 59½ and after the five-year period has ended. The five-year period is determined based on the first contribution to the Roth IRA; the starting date of the five-year period is not reset for the subsequent contributions.
Note that if Heidi opens her first Roth IRA late in 2018, even in December, the first contribution will be a 2018 Roth IRA contribution and Heidi will reach the five-year mark on January 1, 2023.
Conversion factors
Other than making regular contributions, Roth IRAs may be funded by converting a traditional IRA to a Roth IRA and paying tax on any pre-tax dollars moved to the Roth side. For such conversions, a separate five-year rule applies. There generally is a five-year waiting period before a Roth IRA owner who is under age 59½ can withdraw the dollars contributed to the Roth IRA in the conversion that were includible in income in the conversion, without owing a 10% early withdrawal penalty.
Similar to the five-year rule for qualified distributions, the five-year period for conversions begins on the first day of the year of the conversion. However, unlike the five-year rule for qualified distributions, the five-year rule for conversions applies separately to each Roth IRA conversion.
Example 2: In 2018, Jim Bradley, age 41, leaves his job and rolls $60,000 from his 401(k) account to a traditional IRA, maintaining the tax deferral. If Jim decides to withdraw $20,000 next year, at age 42, he would owe income tax on that $20,000 plus a 10% ($2,000) penalty for an early withdrawal.
Instead, in 2019, Jim converts $20,000 from his traditional IRA to a Roth IRA and includes the entire amount converted in income. However, if Jim withdraws that $20,000 in 2019, he also will owe the 10% penalty because he does not meet the five-year rule for conversions; the rationale is that the IRS doesn’t want people to avoid the early withdrawal penalty on traditional IRA distributions by making a Roth conversion.
The good news is that, in this example, Jim will have started the five-year clock with his 2019 Roth IRA conversion. Therefore, he can avoid the 10% early withdrawal penalty on the conversion contribution after January 1, 2024, even though he will only be age 47 then. Jim will owe income tax on any withdrawn earnings, though, until he reaches age 59½ or he meets one of the other qualified distribution criteria.
Note that various exceptions may allow Jim to avoid the 10% penalty before the end of the five-year period. Altogether, the taxation of any Roth IRA distributions made before five years have passed and before age 59½ can be complex. If you have a Roth IRA, our office can explain the likely tax consequences of any distribution you are considering. Generally, it is better to wait until the age 59½ and five-year tests are passed before making Roth IRA withdrawals, to avoid taxes.
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Roth IRA Distributions
Roth IRA distributions after age 59½ (and five years after you set up and make a contribution to your first Roth IRA) qualify for complete tax-free treatment.
Distributions that do not qualify for this tax-free treatment may be subject to income tax, a 10% early withdrawal penalty, or both.
Ordering rules apply to non-qualified distributions.
First come regular contributions, rollover contributions from other Roth IRAs, and rollover contributions from a designated Roth account.
Next come conversion contributions, on a first-in, first-out basis. The taxable portion comes before the nontaxable portion.
Earnings on contributions are the last dollars to come out.