Unconventional investing puts retirement at risk

Clients who invest their retirement accounts in unconventional assets—such as real estate, precious metals, private equity or virtual currency like bitcoin—could be placing their savings at risk, according to a new report.

The report, from the Government Accountability Office, found that retirement accounts allowing such unconventional investments increase the responsibilities of the account owners in ways they may not understand. Those mistakes could trigger additional taxes and tax penalties. On top of that, account custodians can prematurely close an account or let valueless assets and fraud go undetected because they didn’t determine the value of unconventional assets accurately.

In the report, the GAO recommended the IRS improve its guidance for account owners with unconventional retirement assets and clarify how they should annually value these types of assets.

Federal data collection efforts so far have uncovered little information on retirement accounts holding unconventional assets, so the prevalence of such accounts is unknown. In tax year 2015, the IRS started to require custodians or trustees of individual retirement accounts, such as banks, to report selected information on unconventional assets in their clients’ accounts to IRS. Last November, the IRS told the GAO it plans to begin compiling the new IRA asset data in 2017, but it has not specified when the new IRA asset data will be available for analysis.

Seventeen of the 26 custodians identified by the GAO as permitting retirement accounts with unconventional assets, and who participated in the data collection effort, reported having nearly half a million of these accounts in their custody at the end of calendar year 2015. IRAs constituted the vast majority of the accounts and assets reported.

An IRA owner’s decision to invest in unconventional assets can expand their role and responsibilities substantially, the GAO noted. Its review of industry documents found that individuals who wanted to invest in unconventional assets through their IRAs generally agreed to be responsible for overseeing the selection, management and monitoring of account investments and shoulder the consequences of most decisions affecting their accounts. The owners of such accounts thus assume a fiduciary role, which gives them greater responsibility for overseeing the selection, management and monitoring of their account investments, and they shoulder the consequences of most decisions affecting their accounts.

However, the current IRS guidance provides little information to help IRA owners understand their expanded responsibilities and the potential challenges of investing in unconventional assets. Targeted IRS guidance for these IRA owners could help them deal better with the potential compliance challenges associated with certain types of unconventional assets.

The GAO found that some IRA owners can face challenges in monitoring for ongoing federal tax liability. IRA owners are not always aware of the need to monitor the gross income from certain unconventional assets in their accounts for tax liability. For example, IRA owners who invest in active businesses or debt-financed properties need to monitor their accounts for ongoing tax liability that must be paid out of the IRA. Failure to do so can result in underpayment penalties, the GAO noted.

Another problem can arise with obtaining annual fair market valuations for non-publicly traded assets. IRA owners who invest in hard-to-value unconventional assets can face challenges meeting their responsibilities to provide updated fair market value information to their custodian to meet the IRS’s annual reporting requirement. Failure to provide an updated fair market value in a timely manner can lead to a custodian prematurely distributing account assets to the owner at a fair market value that is not current or is potentially incorrect. That could lead to a loss of tax-favored status for their retirement savings.

Federal law places few restrictions on the types of investments allowable in tax-favored retirement accounts, such as IRAs or employer-sponsored 401(k) plans. “Recent federal and state investigations and litigation have raised questions as to whether investing in unconventional assets may jeopardize the accounts’ tax-favored status, placing account owners ’ retirement security at risk,” said the GAO.

The GAO made three recommendations to the IRS, including improving the guidance for account owners with unconventional assets on monitoring for ongoing federal tax liability and to clarify how to determine the fair market value of hard-to-value unconventional assets. The IRS generally agreed with the GAO’s recommendations.

“One of the biggest decisions an IRA owner has to make is how to invest IRA assets,” wrote John M. Dalrymple, deputy commissioner for services and enforcement at the IRS, in response to the report. “IRA owners that invest in unconventional assets could potentially have unforeseen tax liability as well as risk not having sufficient assets to retire.”

Year-End Tax Tips

Year-End Tax Tips

Steps to take before the New Year for a better tax return in 2017

With Dec. 31 just around the corner, it’s time to start thinking about next season – and to make any last-minute moves that might improve a client’s tax position.

With that in mind, here’s a list of tax tips for you and your clients to think about before the end of 2016, from the National Society of Accountants and others in the field. (A slideshow version of these tips is available here.)

1. First – what’s not changing:While President-elect Trump is in a strong position to enact his promise of lower tax brackets next year, it’s important to remember that the current income tax rates of 10, 15, 25, 33, 35 and 39.6 percent are still in effect for the tax returns being filed next mid-April. The standard deduction amounts remain $6,300 single/married filing separately, and $12,600 for married filing jointly. The standard deduction for heads of households, however, rises to $9,300.

2. Deferring income: If the president-elect does manage to lower and simplify the individual tax brackets per his plan, that means rates next year will be lower, so it might be worth it for individuals to consider deferring some income into 2017. That may mean getting a bonus in January, instead of December, or waiting to redeem a savings bond, or putting off debt forgiveness income.

3. Keep an eye on AGI: Since some tax benefits — including itemized deductions. personal exemptions, and education and adoption credits — get phased out depending on a taxpayer’s adjusted gross income, deferring income may also make sense depending on their current AGI.

4. New permanent incentives for individuals: The PATH Act of 2015 made a number of tax incentives permanent. For individuals, these include:

  • The American Opportunity Tax Credit;
  • The teachers’ $250 classroom expense deduction;
  • The ability to deduct state and local sales tax instead of state income taxes; <
  • The exclusion for direct charitable donation of up to $100,000 from an IRA; and,
  • The 100 percent gain exclusion on qualified small-business stock.

5. New permanent incentives for businesses: The PATH Act of 2015 made a number of tax incentives permanent. For businesses, these include:

  • The reduced five year recognition period for S corp built-in gains tax;
  • 15-year straight-line cost recovery for qualified leasehold improvements, restaurant property and retail improvements; and,
  • Charitable deductions for the contribution of food inventory.

6. Max out retirement accounts: If a taxpayer’s employer offers matching, then maxing out contributions to a 401(k) is as close to a no-brainer as you can get – but even without matching, sequestering income in 401(ks), IRAs, Keoghs and the like is still a great deal.

7. Tax-loss harvesting: Even in the current bull market, a portfolio can contain some duds – but they can still be useful! Taxpayers with large amounts of taxable gains in 2016 may want to offset some of those by realizing losses on those duds to lower their overall capital gains exposure.

8. Be careful with mutual funds: Many mutual funds make capital gains distributions in December, so taxpayers will want to bear that in mind when buying or selling. That a fund is or isn’t planning a major distribution needn’t necessarily be a deal-breaker – but it may add to the eventual tax bill.

IRS to Delay Tax Refunds Involving EITC and ACTC Next Year

WASHINGTON, D.C. (JUNE 13, 2016)

The Internal Revenue Service is warning tax professionals that next year, a new law will require the IRS to hold all Earned Income Tax Credit and Additional Child Tax Credit refunds until Feb. 15 as a safeguard against identity theft and tax fraud.

The IRS pointed out the new law is likely to affect some returns submitted early in the tax filing season. The IRS is encouraging tax professionals to begin preparing for the change now. Planning is also underway for a wider communication effort this summer and fall to alert taxpayers.

The action is driven by the Protecting Americans from Tax Hikes Act of 2015, or PATH Act, which was enacted Dec. 18, 2015. Section 201 of the new law mandates that no credit or refund for an overpayment for a taxable year shall be made to a taxpayer before Feb. 15 if the taxpayer claimed the Earned Income Tax Credit or Additional Child Tax Credit on the return.

The change begins Jan. 1, 2017 and may affect some returns filed early in 2017. To comply with the law, the IRS said it will hold the refunds on EITC and ACTC-related returns until Feb. 15. This allows additional time to help prevent revenue lost due to identity theft and refund fraud related to fabricated wages and withholdings.

The IRS plans to hold the entire refund until that time. Under the new law, the IRS cannot release the part of the refund that is not associated with the EITC and ACTC.

The IRS advised taxpayers to file as they normally do, and tax return preparers should also submit returns as they normally do. The IRS will begin accepting and processing tax returns once the filing season begins, as we do every year. That will not change.

The IRS still expects to issue most refunds in less than 21 days, though IRS will hold refunds for EITC and ACTC-related tax returns filed early in 2017 until Feb. 15 and then begin issuing them.

The IRS plans to work closely with stakeholders and IRS partners to help the public understand this process before they file their tax returns and ensure a smooth transition for this important law change. More information about this law will be posted to IRS.gov and shared with partners and taxpayers throughout the second half of 2016.

New Resources for Small Businesses

A permanent exclusion for qualified SMB stock means big change

APRIL 29, 2016

The extension of the exclusion for gains on qualified small-business stock by the Protecting Americans from Tax Hikes Act of 2015 may change the way some small businesses are funded.

Although the exclusion has existed in a variety of forms since 1993, it was in 2010 that it came to the forefront of startup planning when the exclusion rate was increased to 100 percent. And despite the 100 percent exclusion rate, it has not been widely used as a vehicle to fund startup businesses because of its uncertainty — it was one of the extenders that were periodically re-enacted, sometimes retroactively. The enactment of PATH has changed that by making permanent the Section 1202 exclusion, adding certainty to the planning for new ventures and small businesses, according to CohnReznick partners Dave Logan and Asael Meir.

“Now, founders and investors can plan their investment activities with this in mind,” said Logan. “Until now, the vehicle typically used by investors was convertible debt.”

 “Historically, in the early stages, investors would come in with formal convertible debt,” Meir said. “It takes the form of a loan to the company with the right to convert it into stock at a discount. If an investor holds convertible debt for four years and then converts it, they won’t be able to take advantage of the exclusion, but if they had bought it as stock from Day One and then sell it more than five years later, it will meet one of the qualifications for the exclusion. It’s important to be in equity from Day One.”

“For example, an investor comes in with $10 million as convertible debt,” Meir said. “Five years later the company sells, and the investor will receive $100 million. The investor will be taxed on capital gain at a 25 percent rate.”

But take the same scenario, except that from Day One the investor put in $10 million for stock and sells for $100 million. “Potentially, the whole $100 million is excluded,” said Meir.



“Section 1202 encourages holding and not speculating,” noted Marty Davidoff, of E. Martin Davidoff and Associates. “This is good for small businesses, and small businesses are the economic locomotive.”

“What’s really good is that Congress is starting to add certainty throughout the Tax Code,” he added. “The constant rush to legislate extenders at the end of the year has been silly — making these permanent is a good thing.”

“Although this is not targeted at the mom-and-pop businesses, at some point when a business becomes large enough that outside investors may be interested in it, any benefit helps,” observed Roger Harris, president of Padgett Business Services.

The excludible amount is the greater of $10 million or 10 times the aggregate adjusted bases of qualified small-business stock issued by the corporation and disposed of by the taxpayer during the tax year.

In order to qualify for the exclusion, the stock must be qualified small-business stock, and it has to be held for more than five years, Logan noted.

“The company has to be a C corp, and the stock has to be acquired by the taxpayer at original issue, and at all times prior, including the transaction when the acquisition takes place, the gross assets of the corporation have to be $50 million or less,” he said. “That includes the transaction, so when you acquire the stock, that funding is included. It can grow afterwards, but at the date of the acquisition, the assets have to be $50 million or less, including the amount contributed.”

Specifically, the requirements under Code Sec. 1202 to qualify for the exclusion include:

  • The qualified small-business stock must be from a C corporation.
  • The taxpayer must be a non-corporate taxpayer.
  • The qualified small-business stock must be held for more than five years.

The stock must have been acquired by the taxpayer at original issue, either directly or through an underwriter, in exchange for money or property, not including stock or as pay for services provided to the corporation (other than services performed as an underwriter of the stock).

The C corporation must have total gross assets of $50 million or less at all times after August 9, 1993, and immediately after it issues the stock.

In addition, there is an active business requirement. During the taxpayer’s holding period of the stock, at least 80 percent of the corporation’s assets must be used in the active conduct of one or more qualified trades or businesses.

“It can’t be a service organization, such as an accounting firm, or a law firm relying on members’ expertise to provide to clients,” Logan said. “It has to be held for more than five years, and the entity that owns the stock must be a non-corporate owner. There’s a special rule for partnerships, but it is limited to what happens afterwards. If you’re in a partnership and the partnership buys stock, it can qualify, but the exclusion would not work for any new partner.”

Other businesses that are not “qualified trades or businesses” are banking, insurance, financing, leasing, investing, or similar businesses; any farming business; any business involving the production or extraction of products for which percentage depletion can be claimed; or any business of operating a hotel, motel, restaurant, or similar business, Logan indicated.

To preserve the possibility of the exclusion, care should be taken in the form that the financing takes, he noted. “Equity should be considered versus other forms because of the potential exclusion. Often, founders are not aware that they’re holding qualified stock. They’re not aware of the exclusion,” he said. “On exit planning, make sure it is the stock that is being sold for value, as opposed to selling the assets in the C corporation.”

“For example, if I own a software company and sell the code, I pay tax on it as an asset sale, but if I sell the stock in the corporation it can quality for the exclusion,” Meir said. “This provision has been under the radar, so it’s important to advise your clients that may have such holdings to see if the stock would qualify. If they sell if after four and one-half years, they won’t get the exclusion, but if they hold it for an additional half year they could possibly exclude all their gain.”

Sanders Paid $27,653 in 2014 Taxes on Income of $205,271



(Bloomberg) Vermont Senator Bernie Sanders and his wife earned $205,271 in adjusted gross income in 2014 and paid $27,653 in taxes—an effective rate of about 13.5 percent, according to documents released Friday.

The Democratic presidential candidate, who has said Jane Sanders files the couple’s federal income taxes, provided paperwork listing $56,377 in 2014 deductions. They paid $24,509 in state and local income taxes and property taxes and $22,946 in home mortgage interest while making $8,350 in charitable contributions.

Sanders earlier had released the first two pages of his 2014 tax return last year but had provided no detail about the deductions.

Sanders’s taxes have become an issue in his campaign for the Democratic presidential nomination. He has released information for the 2014 tax year only, far less than front-runner Hillary Clinton.

Jane Sanders told Bloomberg Television’s “With All Due Respect” on Monday that she does the couple’s taxes using tax-preparation software and that the 2015 version—“a pretty simple return”—would be released as soon as it’s ready. Monday is the annual deadline for filing individual income-tax returns in most of the U.S.

The couple’s return is “remarkable for just how unremarkable it is,” said Tony Nitti, a partner in the Aspen, Colorado, office of the accounting firm WithumSmith+Brown. The return may add to Sanders’s image as an “everyman” candidate, Nitti said. Given the lack of explosive detail, he added: “What was the problem? What was the delay in getting this thing out there?”

Sanders’s campaign didn’t immediately respond to questions about his taxes.

Most of the couple’s 2014 income was attributable to Sanders’s salary of $174,000 a year as a U.S. senator. They also reported $46,213 in Social Security benefits that year, $39,281 of which was taxable income, and $4,982 in taxable pension income that Sanders receives for having been mayor of Burlington, Vermont. The 2014 form also listed $4,900 in business income that Jane Sanders received as a member of a commission on the management of low-level radioactive waste disposal.

Trump’s Taxes
Among the 2016 major-party presidential candidates, Sanders’s lack of transparency regarding his taxes had been second only to Republican front-runner Donald Trump before Friday’s release. Trump has said he’s under an audit, and won’t release any returns until it’s over. The other Republican candidates—Senator Ted Cruz of Texas and Governor John Kasich of Ohio—have posted several years’ worth of partial returns online.

Clinton has disclosed eight years of full returns, including detailed schedules, on her campaign website, and there are decades of returns for her and Bill Clinton available online. The Clintons’ 2014 return, which is the most recent her campaign has released, showed that the couple reported $27.9 million in adjusted gross income—about 136 times the amount reported by Sanders and his wife that year.

Tad Devine, a political adviser to Sanders, said the candidate would release returns from previous years “soon” after this year’s filing is finished by Jane Sanders. “Bernie is happy to be transparent,” Devine said in an interview on CNN.

In 2014, the senator and his wife reported $2 in income from ordinary dividends and $11 in taxable interest. Their $56,377 in deductions for the year is higher than average for their income level, according to a 2014 Congressional Research Service report, which found that in 2011, taxpayers reporting adjusted gross income from $200,000 to $250,000 claimed an average of $39,470 in itemized deductions.


CPA, Taxes, Bookkeeping, Payroll, Accounting Services, Insurance

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