Tax Calendar

July 24 2017

July 17 — If the monthly deposit rule applies, employers must deposit the tax for payments in June for Social Security, Medicare, withheld income tax and nonpayroll withholding.

July 31 — If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through June exceeds $500.

  • The second quarter Form 941 (“Employer’s Quarterly Federal Tax Return”) is also due today. (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 August 10 to file the return.

August 15 — If the monthly deposit rule applies, employers must deposit the tax for payments in July for Social Security, Medicare, withheld income tax and nonpayroll withholding.

September 15 — Third quarter estimated tax payments are due for individuals, trusts and calendar-year corporations.

  • If a six-month extension was obtained, partnerships should file their 2016 Form 1065 by this date.
  • If a six-month extension was obtained, calendar-year S corporations should file their 2016 Form 1120S by this date.
  • If the monthly deposit rule applies, employers must deposit the tax for payments in August for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

Please contact Martini, Iosue & Akpovi, LLP by phone at (818) 789-1179 if you have questions or want more information.

 

Renting Out Your Vacation Home? Anticipate The Tax Impact

July 17 2017

When buying a vacation home, the primary objective is usually to provide a place for many years of happy memories. But you might also view the property as an income-producing investment and choose to rent it out when you’re not using it. Let’s take a look at how the IRS generally treats income and expenses associated with a vacation home.

Mostly Personal Use

You can generally deduct interest up to $1 million in combined acquisition debt on your main residence and a second residence, such as a vacation home. In addition, you can also deduct property taxes on any number of residences.

If you (or your immediate family) use the home for more than 14 days and rent it out for less than 15 days during the year, the IRS will consider the property a “pure” personal residence, and you don’t have to report the rental income. But any expenses associated with the rental — such as advertising or cleaning — aren’t deductible.

More Rental Use

If you rent out the home for more than 14 days and you (or your immediate family) occupy the home for more than 14 days or 10% of the days you rent the property — whichever is greater — the IRS will still classify the home as a personal residence (in other words, vacation home), but you will have to report the rental income.

In this situation, you can deduct the personal portion of mortgage interest, property taxes and casualty losses as itemized deductions. In addition, the rental portion of your expenses is deductible up to the amount of rental income. If your rental expenses are greater than your rental income, you may not deduct the loss against other income.

If you (or your immediate family) use the vacation home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. In this instance, while the personal portion of mortgage interest isn’t deductible, you may report as an itemized deduction the personal portion of property taxes. You must report the rental income and may deduct all rental expenses, including depreciation, subject to the passive activity loss rules.

Brief Examination

This has been just a brief examination of some of the tax issues related to a vacation home. Please contact our firm for a comprehensive assessment of your situation.

Please contact Martini Iosue & Akpovi, LLP by phone at 818-789-1179 if you have any questions or want more information.

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New Accounting Rule May Lower Perceived Value Of Franchisors

July 12 2017

By Christopher L. Passmore, Managing Partner of Martini Iosue & Akpovi, and Barry Kurtz, chair of the Franchise & Distribution Practice Group at Lewitt Hackman 

Originally published in the June 29 edition of the Daily Journal

Franchisors will need to adjust their methods when accounting for franchise fees either this year or next, depending on whether the system is publicly owned or not. The Financial Accounting Standards Board (FASB) updated a rule that changes when most franchisors recognize revenue in their financial statements from initial franchise fees.

The impact of this rule, FASB Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASC 606), will negatively affect many balance sheets and may have unintended consequences.

To provide context, initial franchisee fees used to be recognized as revenue for a franchisor upon receipt, generally on completion of a franchise sale.

Then in March 1981, the FASB Statement of Financial Accounting Standards No. 45, Accounting for Franchise Fee Revenue, changed standards for continuing franchise fees, product sales, agency sales, repossessed franchises, costs, comingled revenue and even relationships between franchisors and franchisees. In essence, Rule 45 prohibited franchisors from recognizing franchise fees until all initial services required under the franchise agreement were performed by the franchisor. Generally, a franchisee opening for business was the best indicator that the franchisor fulfilled these obligations.

Under Rule 45, the franchisor could count on additional cash on a balance sheet when that initial franchise fee was received. On the other hand, a corresponding liability for the deferred initial franchise fee remained — at least until the new franchisee began operations.

Negative Effects and Unintended Consequences of New Rule

Fee recognition standards changed again with the FASB’s issuance of new rules last May. Public companies will be required to apply the new revenue standards to annual reporting periods beginning after Dec. 15, 2017. Nonpublic companies have additional time to prepare and are required to apply the new standards to annual reporting periods beginning after Dec. 15, 2018.

As a result, franchisors will face several consequences, which may even cause a never-ending cycle of negative impact. Consider these scenarios:

Under the new accounting standards, the granting of a franchise right represents a distinct performance obligation that is satisfied over time, and initial franchise fees will be stretched out over the life of the franchise agreement. Franchisors will now have to determine how much of the initial franchise fee should be allocated to this franchise right.

This exercise will require franchisors to assess whether their other upfront services are distinct and separate performance obligations under their franchise agreements. In order to be a separate performance obligation, the provided service must represent distinct obligations within the franchise agreement and have a standalone value. Franchisors will have to evaluate their franchise agreements to determine whether the services provided to franchisees are distinguishable from the general franchise right.

Examples to consider are values that could be allocated to franchisors’ advisory and consulting services on site criteria, selection and evaluation, facility specifications and design, pre-opening and continuing management training programs, operations manuals, product sourcing, marketing guidance and the like. Notwithstanding these possibilities, it is generally expected that most of the initial franchisee fee will be allocated to the franchise right performance obligation and recognized on a straight-line basis over the franchise term.

It is important to note that the recognition of revenue related to royalty income is expected to remain unchanged as a result of the new rules.

This could make income look a little thin. If an initial franchise fee is $50,000 and the term of the agreement is 20 years, revenue will be recognized as $2,500 per year for those 20 years. Additionally, the new rule will apply to multi-unit development as well. Franchisors face the stigma of lowered valuations, again because they will not be able to recognize all initial franchise fees as revenue when the first location opens, but rather, as each location opens, further diluting value.

In addition to the deferral of revenue, franchisors will have to retrospectively calculate the impact of the new revenue recognition standards for prior year franchise agreements in effect at the date of adoption. Franchisors have the choice to restate the financial statements of all prior periods presented or record a cumulative “true-up” in the year of adoption with comprehensive supporting footnote disclosure.

Income will be reduced and liabilities will increase.

Deferred liability reduces net worth and may trigger registration state restrictions on the franchisor’s ability to collect initial franchise fees when a franchise agreement is signed, which also negatively reflects on the system’s perceived value. Extrapolating further, the decreased value offers potential for unhappy unit owners to back out of agreements, citing misinformation on franchise disclosure statements. And that can lead to claims and litigation.

Growing franchise systems that rely on franchise sales for revenue could take a hit, as the system as a whole may be seen as less attractive. This could turn off potential franchise buyers.

Please contact Martini, Iosue & Akpovi, LLP by phone at (818) 789-1179 if you have questions or want more information.

 

Our 2017 Summer Interns Share Their Experiences Of Working For Martini, Iosue & Akpovi

July 10 2017

As Christopher Speights, Nataly Ruiz and Ivan Pena approach the end of their internships, they reflect on their experiences.

From left to right Christopher Speights, Ivan Pena and Nataly Ruiz

First, let’s hear from Christopher.

At Martini, Iosue and Akpovi, I am assisting staff and managers to prepare both domestic and international tax returns. In my brief tenure, I have had the opportunity to work alongside like-minded people and pick their brains for invaluable information.

My career aspirations are to become a certified public accountant and to work at an accounting firm whose culture and people are compatible to my personality and ethics. I can proudly say that after graduation, I would like to work at Martini, Iosue and Akpovi.

The internship has exposed me to the tremendous amount of codes, laws and regulations, and forms that accounting professionals must keep pace with if they are to survive in the world of accountancy. Additionally, the internship has revealed the importance of the mastery of fundamental accounting principles. Before the internship, I strongly believed that I needed to know everything about accounting – including intermediate and advanced accounting subjects. However, I quickly realized that is an insurmountable task, and simply having a mastery of accounting fundamentals will more than suffice. Most importantly, I have learned that a perpetual thirst for knowledge and an inquisitive mind are vital to the success of young professionals.

Next, Ivan reflects on the last few weeks

Since day one, I have been trained in a variety of different accounting procedures. I have been able to assist in the preparation of tax returns for individuals, corporations, partnerships, and trusts. Furthermore, I have been able to prepare some US international tax forms. My training has been imparted on a one-to-one approach by current accounting staff and managers in the firm. As part of the training, I have been exposed to the audit service by completing simulated audit reviews for cash, accounts receivable, prepaids, and other types of accounts.

The internship has helped me realize how complex tax returns can be, however, the staff have been very patient with the interns learning all the new material in a short amount of time. Coming in, I didn’t know which area of accounting would be a better fit for me. While tax has been a novel experience, audit has sparkled interest in me as well. As of now, I been working on audit review simulations. I see audit as a big puzzle that has to be put together. I have learned that an auditor must question the validity of the numbers on the financial reports. On the other hand, one thing I love about tax is that there is constant learning for tax professionals. The field of tax requires on-going education because tax law is always changing. Ultimately, through this internship, I have realized that public accounting is the right career I would like to pursue after obtaining my bachelor’s degree in accountancy.

And finally Nataly shares her experiences

I am assisting the International Tax team in the completion of complex returns. This means I am engaging in continuous knowledge development regarding regulations, best practices, tools and techniques.

I have grown my technical accounting skills by being exposed to real word accounting issues. I have also grown professionally through building a strong, professional network with Martini, Iosue and Akpovi employees and the other interns.

Interning at Martini, Iosue and Akpovi has given me the opportunity to confront and overcome the “fear of the unknown” that I had about what it’s like to work in a professional environment.

Please contact Martini, Iosue & Akpovi, LLP by phone at (818) 789-1179 for more information about our internship program.

 

Thoughts and Musings On Family Budgeting

July 10 2017

Simplicity is the key to a successful family budget. But every budget needs to cover all necessary items. To find the right balance, your budget should address two distinct facets of your family members’ lives: the near term and the long term.

In the near term, your budget should encompass the primary, day-to-day items that affect every family. First, housing: This is often the biggest expense in a family budget. And a budget shouldn’t include only mortgage or rent payments, but also expenses such as utilities, furnishings, maintenance and supplies.

Naturally, there are other items related to daily life for which you need to account. These include groceries, vehicle and transportation expenses, clothing, child care, insurance and out-of-pocket medical expenses. And you need to draw clear distinctions between fixed and discretionary spending.

Along with being a practical guide to family spending, a budget needs to address long-term goals. Naturally, some goals are further out than others. One of your longest-term objectives is probably to retire comfortably. So the budget should incorporate retirement plan contributions and other ways to meet this goal.

A relatively less long-term goal might be funding your children’s education. So, again, the budget should reflect this. And, as a long-term but “as soon as possible” objective, the budget needs to be structured to pay off debt and maintain a strong credit rating.

Only through careful planning and discussion can families build a budget that addresses both daily finances and long-term financial goals. We can help you get started.

Please contact Martini Iosue & Akpovi, LLP by phone at 818-789-1179 if you have questions or want more information.

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Congratulations Chester Ventura And Joe Fernandez For Graduating From The PrimeGlobal Leadership Program

July 5 2017

The program provides tools on how to lead a new generation of professionals in a fast-evolving public accounting industry. Here’s what Chester and Joe had to say about the program:

 “The program helped us solidify our leadership skill set by showing us how to complete certain objectives using a team first approach. Back in the office, this has helped us build and foster long-term relationships with associates, peers and partners. We would recommend this course to anyone looking to develop skills to lead.”

Please contact Martini, Iosue & Akpovi, LLP by phone at (818) 789-1179 if you have questions or would like more information.

 

Could A Cost Segregation Study Save Your Company Taxes

June 30 2017

If your business has acquired, constructed or substantially improved a building recently, consider a cost segregation study. One of these studies can enable you to identify building costs that are properly allocable to tangible personal property rather than real property. And this may allow you to accelerate depreciation deductions, reducing taxes and boosting cash flow.

Overlooked Opportunities

IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Often, businesses will depreciate structural components (such as walls, windows, HVAC systems, elevators, plumbing and wiring) along with the building.

Personal property — such as equipment, machinery, furniture and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor lighting and parking lots, for example — are depreciable over 15 years.

Too often, companies allocate all or most of a building’s acquisition or construction costs to real property, overlooking opportunities to allocate costs to shorter-lived personal property or land improvements. Items that appear to be part of a building may in fact be personal property. Examples include:

* Removable wall and floor coverings
* Detachable partitions
* Awnings and canopies
* Window treatments
* Signage
* Decorative lighting

In addition, certain items that otherwise would be treated as real property may qualify as personal property if they serve more of a business function than a structural purpose. Examples include reinforced flooring to support heavy manufacturing equipment, electrical or plumbing installations, and dedicated cooling systems for server rooms.

A Study In Action

Let’s say you acquired a nonresidential commercial building for $5 million on January 1. If the entire purchase price is allocated to 39-year real property, you’re entitled to claim $123,050 (2.461% of $5 million) in depreciation deductions the first year.
A cost segregation study may reveal that you can allocate $1 million in costs to five-year property eligible for accelerated depreciation. Reallocating the purchase price increases your first-year depreciation deductions to $298,440 ($4 million × 2.461%, plus $1 million × 20%).

Impact of Tax Law Changes

Bear in mind that tax law changes may occur this year that could significantly affect current depreciation and expensing rules. This in turn could alter the outcome and importance of a cost segregation study. Contact our firm for the latest details.

On the other hand, any forthcoming tax law changes likely won’t affect your ability to claim deductions you may have missed in previous tax years. (For more on this concept, see “It may not be too late: Look-back studies.”)

Worthy Effort

As you might suspect, a cost segregation study will entail some effort in analyzing your building’s structural components and making your case to the IRS. But you’ll likely find it a worthy effort.

Sidebar: It May Not Be Too Late: Look-Back Studies

If your business invested in depreciable buildings or improvements in previous years, it may not be too late to take advantage of a cost segregation study. A “look-back” cost segregation study allows you to claim missed deductions in qualifying previous tax years.

To claim these tax benefits, we can help you file Form 3115, “Application for Change in Accounting Method,” with the IRS and claim a one-time “catch-up” deduction on your current year’s return. There will be no need to amend previous years’ returns.

Please contact Martini Iosue & Akpovi, LLP by phone at 818-789-1179 if you have questions or want more information.

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Reviewing The Innocent Spouse Relief Rules

June 23 2017

Married couples don’t always agree — and taxes are no exception. In certain cases, an “innocent” spouse can apply for relief from the responsibility of paying tax, interest and penalties arising from a spouse’s (or former spouse’s) improperly handled tax return. Although it isn’t easy to qualify, potentially affected taxpayers should review the rules.

Applicants may qualify for various forms of relief if they can meet the applicable IRS conditions. One factor that’s considered is whether the applicant received any significant direct or indirect benefit from the tax understatement. For instance, an applicant’s case could be weakened if he or she had used unreported income to pay extraordinary household expenses.

The IRS will also look at the distinctive aspects of the case. The fact that a spouse applying for relief has already divorced his or her partner is significant. Whether the applicant was abused physically or mentally will also play a role, as will whether he or she was in poor mental or physical health when the return(s) in question was signed. In addition, the IRS will consider whether the applicant would experience economic hardship without relief from a significant tax debt.

Generally, an applicant must request innocent spouse relief no later than two years after the date the IRS first attempted to collect the tax. But other forms of relief may still be available thereafter. Please contact our firm for more information.

Please contact Martini Iosue & Akpovi, LLP by phone at 818-789-1179 if you have questions or want more information.

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Viatical Settlements – A Funding Mechanism For Medical Costs

June 16 2017

Someone who’s terminally or chronically ill may lack the funds to cover significant medical costs. Although insurance policies have historically been held for the death benefits, it may be possible to sell a policy to a viatical settlement provider. This way, the individual can secure much-needed and generally tax-free cash while still alive.

Buyers and Sellers

Viatication allows a terminally ill person to sell an existing life insurance policy to an investor for more than its cash surrender value but less than its net death benefit. The buyer continues to pay the premiums and receives the life insurance proceeds upon the death of the insured. Many companies currently either buy the policies themselves or serve as brokers to match buyers and sellers for a fee.

In identifying a potential seller, many viatical companies limit their selection to terminally ill individuals with a certain remaining life expectancy (for example, 24 months or less). This is because the company wants to minimize its risk that the individual will outlive his or her life expectancy, resulting in a lower return from the purchase of the life insurance policy for the company.

Factors To Consider

To determine whether it would be advantageous to sell a policy, the insured should consider factors such as:

* His or her cash needs
* The discount in the value of the death benefit
* The possibility that payments will disqualify him or her for Medicaid benefits
* Access to the payments by his or her creditors

(Regarding the last point, the cash value while it remains in a life insurance contract may not be subject to the claims of creditors.)

Tax Consequences

Amounts received under a life insurance contract on the life of terminally ill (or within limits, chronically ill) individuals are excluded from gross income for federal income tax purposes. A similar exclusion applies to the sale or assignment of any portion of a death benefit to a viatical settlement provider if the insured is chronically or terminally ill and the payments in question are funded by and diminish the life insurance policy’s death benefit.

However, the exclusion doesn’t apply if the accelerated death benefits are paid to someone other than the insured individual and the recipient has a business or financial relationship with the insured.

Rules and Issues

Viatication is a complex and sensitive topic. Let us help you navigate the applicable rules and issues.

Please contact Martini Iosue & Akpovi, LLP by phone at 818-789-1179 if you have questions or want more information.

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Watch Out For IRD Issues When Inheriting Money

June 9 2017

Once a relatively obscure concept, income in respect of a decedent (IRD) can create a surprisingly high tax bill for those who inherit certain types of property, such as IRAs or other retirement plans. Fortunately, there are ways to minimize or even eliminate the IRD tax bite.

How It Works

Most inherited property is free from income taxes, but IRD assets are an exception. IRD is income a person was entitled to but hadn’t yet received at the time of his or her death. It includes:

* Distributions from tax-deferred retirement accounts, such as 401(k)s and IRAs

* Deferred compensation benefits and stock option plans

* Unpaid bonuses, fees and commissions

* Uncollected salaries, wages, and vacation and sick pay

IRD isn’t reported on the deceased’s final income tax return, but it’s included in his or her taxable estate, which may generate estate tax liability if the deceased’s estate exceeds the $5.49 million (for 2017) estate tax exemption, less any gift tax exemption used during life. (Be aware that President Trump and congressional Republicans have proposed an estate tax repeal. It hasn’t been passed as of this writing, but check back with us for the latest information.)

Then it’s taxed — potentially a second time — as income to the beneficiaries who receive it. This income retains the character it would have had in the deceased’s hands. So, for example, income the deceased would have reported as long-term capital gains is taxed to the beneficiary as long-term capital gains.

What Can Be Done

When IRD generates estate tax liability, the combination of estate and income taxes can devour an inheritance. The tax code alleviates this double taxation by allowing beneficiaries to claim an itemized deduction for estate taxes attributable to amounts reported as IRD. (The deduction isn’t subject to the 2% floor for miscellaneous itemized deductions.)

The estate tax attributable to IRD is equal to the difference between the actual estate tax paid by the estate and the estate tax that would have been payable if the IRD’s net value had been excluded from the estate.

Suppose, for instance, that you’re the beneficiary of an estate that includes a taxable IRA. If the estate tax is $150,000 with the retirement account and $100,000 without, the estate tax attributable to the IRD income is $50,000. But be careful, because any deductions in respect of a decedent must also be included when calculating the estate tax impact.

When multiple IRD assets and multiple beneficiaries are involved, complex calculations are necessary to properly allocate the income and deductions. Similarly, when a beneficiary receives IRD over a period of years — IRA distributions, for example — the deduction must be prorated based on the amounts distributed each year.

We Can Help

If you inherit property that could be considered IRD, please consult our firm for assistance in managing the tax consequences. With proper planning, you can keep the cost to a minimum.

Please contact Martini Iosue & Akpovi, LLP by phone at 818-789-1179 if you have questions or want more information.

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