Category Archives: Financial Tid-bits

Choosing the best way to reimburse employee travel expenses

If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. But to secure tax-advantaged treatment for your business and your employees, it’s critical to comply with IRS rules.

Reasons to reimburse

While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees won’t be able to benefit from the deduction. Why?

It’s likely that some of your employees don’t itemize. Even those who do may not have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income floor. And only expenses in excess of the floor can actually be deducted.

On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements (also subject to a 50% limit for meals and entertainment), and they’re excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan.

Per diem method

The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)

The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities.

You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so.

Accountable plan

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:

  • It must pay expenses that would otherwise be deductible by the employee.
  • Payments must be for “ordinary and necessary” business expenses.
  • Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
  • Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.

If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).

Whether you have questions about which reimbursement option is right for your business or the additional rules and limits that apply to each, contact us. We’d be pleased to help.


My 2%’s Worth

two percentAny time I review an estate or trust income tax return, Form 1041, I pause on Line 15.  That’s the spot where a decision must be made to subject “Other deductions” to the 2% of income floor or to take full advantage of those deductions.

When I arrive at Line 15 I have already fully deducted, legitimately, several items that individuals would not be able to fully deduct on their personal returns.  For example, fiduciary fees, attorney fees, accounting fees, and return preparation fees are all fully deductible on Form 1041, but not on Form 1040.  On Form 1040, they would be subject to a 2% of adjusted gross income floor.

It is not surprising that I pause on Line 15.  This has been an unsettled area of the tax law for the past 28 years.  A lot of court cases have looked at the expenses being deducted there and compared them to the expenses incurred by individuals for the same services.  The cases have concluded that the fees are fully deductible if they were only incurred because the property is held in a trust or estate. If the fees could have been incurred by individuals owning the same type of property, the expenses are subject to the 2% floor.

This is illogical and inconsistent.  Welcome to the world of tax law.  It is just like the world of parenting, where we were often told, “You will do it that way because I said so.”

The vast majority of the expenses under scrutiny are normally labeled investment fees.  Well, we finally have final regulations about what to do with those fees, effective for tax years beginning on or after May 9, 2014.  That would include a decedent whose date of death is on or after that date.  On calendar 2015 returns, we will handle the five types of costs discussed in the regulations as follows:

1.  Ownership costs. Any costs incurred simply by owning the property will be subject to the 2% floor.   For example, these include: condominium fees, insurance premiums, maintenance and lawn service, and miscellaneous itemized deductions from passthrough entities.

2.  Tax preparation fees. Continuing to be fully deductible are the preparation of estate and GST tax returns, fiduciary income tax returns (the Form 1041), and the decedent’s final individual income tax return.

Bizarrely omitted from full deductibility is any other type of tax return, including the decedent’s final gift tax returns and final Form 114, Report of Foreign Bank and Financial Accounts.  In other words, all other return preparation costs are subject to the 2% floor.

3.  Appraisal fees. These are fully deductible by an estate or trust if incurred for determining the value of assets of a decedent’s estate; determining distributions, such as a unitrust payment; or preparing tax returns. All other appraisals are subject to the 2% floor.

4.  Fiduciary expenses. These costs to administer an estate, such as probate court costs, surety bond premiums, publishing legal notices, cost of death certificates, etc., are fully deductible.

5.  Investment advisory fees. This is usually the largest expense on Form 1041. It is now officially limited by the 2% floor. Banks and trust companies are allowed to break out the portion of their fees that relate to fiduciary, legal, and accounting fees. If broken out for you, you can fully deduct fiduciary, legal, and accounting fees.

In the years leading up the final regulations, we were at various times told we could fully deduct investment fees and could not fully deduct investment fees.  As we tend to be consistent from year to year on tax returns, we will have to be vigilant to adopt the final regulations when preparing Form 1041.

The final regulations are fairly consistent with the proposed regulations that were issued for this in 2011.  So, for 2013 and 2014 returns and beyond, we should be limiting pure investment fees to the 2% floor.

Karen S. Cohen, CPA
Principal – Packer Thomas
Feel free to contact Karen with your questions:
(800) 943-4278
(330) 533-9777

Post-Gift Asset Exchange

Money BowJay D. Waxenberg and Nathan R. Brown briefly discuss the idea of post-gift asset exchanges in the July 2014 issue of Trusts & Estates, in an article entitled, The Narrowing “Tax Efficiency Gap”.  The concept surprised me.  It reflects the need for yet another shift in the focus of estate planning.  With the current large exemption from gift and estate tax ($5.34 million in 2014), it is no longer enough to get assets out of an estate in order to keep them from being estate-taxed at the older generation’s death.  We also have to attempt to do it in a way that minimizes the income tax consequences for the younger generation.

Traditionally, we would advise our clients to keep assets that are already highly appreciated in value, in order to take advantage of the step up in basis to date of death value when they pass away.  We would select assets for giving that have a high expectation of future appreciation.  This strategy usually enables the client to leverage his available exclusion, to make it go farther and cover more value.

For example, if an asset worth $1 million today is given to a family member in a younger generation, it may be worth, say, $3 million at the time our donor passes away.  That saves the inclusion of the extra $2 million in value from being taxed in the estate of the older generation.  The drawback to this strategy is that the younger generation is sitting on that extra $2 million of appreciation and would have to pay a significant amount of income tax to turn that asset into cash.  Assuming a 20% capital gains rate, a 3.8% net investment income tax, and, if our client is an Ohio resident, about a 5% Ohio income tax, a sale of this asset would incur tax of about 28.8% of the gain realized.  So, depending on what other characteristics appear in the tax return, the $2 million of appreciation may require the payment of about $576,000 of income tax.

The technique of a post-gift asset exchange may be used to avoid this income tax.  It involves having the donor, shortly before his death, swapping out the original gift asset with another asset of equal value whose basis is close to its fair market value, such as cash.  That way, the donor passes away with the $3 million highly appreciated asset and the asset receives a step up in basis to date of death value in his hands.  The younger generation family member walks away with cash.  He also possibly stands to inherit the other $3 million asset, depending on the rest of the donor’s estate plan, and can now liquidate it with no income tax consequence.

To make this work, the original gift must be made to a trust and the donor must have the right to substitute assets.  We commonly see this right to substitute assets in a planning technique that involves intentionally defective grantor trusts.  The “defect,” the right to substitute assets, is what makes this type of trust a grantor trust for income tax purposes and allows the grantor to continue to be taxed on the income earned in the trust.  The defect is ignored for gift tax purposes.  Such a gift is considered a completed gift that is out of the donor’s estate for estate tax purposes.

In a Journal of Accountancy article in November 2008, Alistair M. Nevius discusses two strategies for reacquiring appreciated assets.  The first is merely to swap out the appreciated asset for an equal value in cash.  The second is to have the trust sell the appreciated asset to the grantor for cash.  Because the transaction is between a grantor and his grantor trust, it is disregarded for income tax purposes.  This sounds plausible and familiar because sales of assets to intentionally defective grantor trusts have long been ignored for income tax purposes.

Waxenberg and Brown have promised a follow-up article on the techniques post-gift asset exchanges.  I will be very interested to learn more about this.

Karen S. Cohen, CPA
Principal – Packer Thomas
Feel free to contact Karen with your questions:
(330) 533-9777

Reviewing and Obtaining Credit Reports & Scores

Credit ReportReviewing your personal credit report on a regular basis is an important step in preventing and detecting identity theft.  Most people are not aware of the fact that Federal law entitles everyone to a free annual credit report.  The best and simplest way to obtain the credit report is not from one of the many trendy free credit report websites advertised to us via online and television ads.  Instead, you may access your truly free credit report at This site gives you access to reports from all three of the consumer credit reporting companies.  You choose whether or not to access all three reports at once, or to spread them out over the course of a year.  From an identity theft standpoint, spreading the reports out is your best bet because it enables you to monitor the reports on a more continuous basis.  Once you obtain the credit report, you should review it to make sure that you recognize all the accounts, loans, and other information (such as places you have lived, etc.) on your report.  If you do find an inaccuracy, you should contact the consumer credit reporting company that provided the credit report.  Unfortunately, although you also have a legal right to obtain your credit score, federal law gives the consumer credit reporting companies the right to charge you a “reasonable fee” for the score.  So, unless you subscribe to one of the few emerging credit card companies that provide your credit score to you for free as part of an additional client service, you will probably be paying for your actual credit score.  At a minimum, be sure to take advantage of the annual opportunity to review your credit report to protect yourself from potential identity theft and other inaccuracies that may be hidden in your credit report.

Kim Murphy, CPA – Packer Thomas
Feel free to contact Kim with your questions:
(330) 533-9777

Fraud and the Trusted Employee

Fraud-2Business owners do not like to hear stories about fraud nor do they believe it could ever happen to them.  However, fraud is very real and very costly. What is even more upsetting is that the majority of employee frauds are committed by the most trusted employees.

Some of our more recent fraud cases involve trusted and long time employees. One involved a manager that was not performing the oversight function he claimed he was doing. The manager’s trusted staff person, of many years, committed fraud by purchasing personal items on the manager’s company credit card. Another case involved someone that had been with an organization for over twenty years and was stealing cash before the funds were taken to the bank. Failure to implement and failure to actually perform strong internal controls are the reasons these frauds were committed and went undetected for a long period of time.

Sound internal controls can help you to prevent or detect fraud. We can assist in combating fraud by 1) reviewing your internal controls and 2) performing data analysis.

Packer Thomas has experienced staff which specializes in reviewing various companies’ internal controls. Even if you are a small business with a limited number of staff, there are still effective controls that can be implemented to help prevent or detect fraud. Our review would help identify the need for added controls and to determine the effectiveness of the controls that are currently in place.

Packer Thomas also has the tools needed in order to perform effective data analysis. We use data extraction software to perform powerful tasks designed to identify high fraud risk areas. For example, we can test for vendor addresses that match employees’ addresses, gaps in numeric sequences, and trend data to identify potential erroneous transactions.

We would be pleased to meet with you to discuss our services as they relate to providing you the additional comfort you need to protect your business against fraud.

Nicole Ferraro, CPA
Principal – Packer Thomas
Feel free to contact Nicole with your questions:
(330) 533-9777

Bross Trucking, Inc., et al v. Commissioner

truck (18)[1]TC Memo 2014-107

When corporations sell their assets, the sale is taxed twice:  once at the corporate level when the corporation pays tax on any gain on the sale and, again, when the proceeds of the sale are distributed to the owners as taxable dividends.  It is not surprising, then, that when a business sells all of its assets, sellers look for ways to alleviate this tax burden.

One such strategy is to take the position that the goodwill inherent in the transaction is attributable to the business owner’s personal efforts and that the goodwill is “owned” by the business owner.  That way, the business owner can sell the goodwill directly to the buyer and report the gain as long-term capital gain, taxed at lower tax rates, and subject to only one level of tax on the seller’s personal return.

There is an often-quoted case where that very position was taken and successfully argued in court.  It is known as the Martin Ice Cream case and the name has become synonymous with personal goodwill.  However, there have been some more recent cases that have made us feel the foundation was a little wobbly under us to continue thinking this position could be taken.

Then along came Bross Trucking.

The explanation of the decision in Bross Trucking not only refers to the Martin Ice Cream case, it illuminates and expands the reasons for attributing goodwill to the owner of the business.  The case was decided in favor of the taxpayer and I am happy about that.

The IRS tried to allege that Bross Trucking distributed goodwill to Chester Bross, the business owner.  As a distribution of appreciated property, it was a taxable event and the IRS assessed tax and penalties. The IRS also alleged that once Chester Bross received this goodwill from Bross Trucking, he made a gift of it to his sons to allow them to use it in the startup of a new trucking company.  For this, the IRS assessed even more tax and penalties.

The Tax Court determined the IRS failed to identify the specifics of the goodwill that was allegedly distributed to Chester Bross and failed to prove that this goodwill was an asset owned by the corporation in the first place.  It was further decided the goodwill was a personal asset of Chester Bross.  And, finally, it was decided he did not give it to his sons in a taxable gift.

The IRS referred to aspects of goodwill that include an established revenue stream, developed customer base, transparency of the continuing operations between the entities, established workforce including independent contractors, and continuing supplier relationships.

The court decided that the only attribute of goodwill owned by Bross Trucking was a workforce in place and that this was not transferred in the sale.  Nearly all the goodwill used by Bross Trucking was attributed to Chester Bross, as a direct result of his personal efforts and relationships.  Chester did not have an employment contract with the company, nor did he sign a non-compete agreement with it.  His experience and expertise were things he owned personally.

To me, all of this looks like good news for taxpayers.  What do you think?

Karen S. Cohen, CPA
Principal – Packer Thomas
Feel free to contact Karen with your questions:
(330) 533-9777


Have you timely deposited your employees’ elective deferrals into the 401(k) plan?

Piggy BankPlan sponsors have a fiduciary responsibility to make sure employees elective 401(k) deferral contributions are submitted to the Plan as soon as possible. The Department of Labor (DOL) has been placing greater pressure on plan sponsors to comply with the deposit requirements of segregating the contributions from its general assets as soon as reasonably possible (but no later than the 15th business day of the month following). Many plan sponsors mistakenly interpret the Department of Labor regulation to permit them to wait until the 15th business day of the following month to deposit 401(k) elective deferral contributions, even if they can segregate the funds earlier. For example, if the pan sponsor has demonstrated that they can segregate the funds in 2 days, then any remittances in excess of 2 days would be deemed late.

Small plans that are not required to have an annual audit must comply with the deposit requirements as well; however, there is a 7 business day safe harbor rule for plans with fewer than 100 participants. No such rule currently exists for plans with greater than 100 participants.

When participant contributions are not transmitted on a timely basis to the Plan, the employer/plan sponsor is deemed to have used the plan assets for their own business purposes and this is considered a prohibited transaction. The penalty on a prohibited transaction can be at least 15% of the amount involved for each year with possible additional penalties at the DOL level. If the prohibited transaction is not corrected, the penalty may be 100% of the amount involved.

So what should you do if you have deposited participant contributions late? There are a number of actions that need to be taken so you will want to research your options in correcting the problem. You can either self-correct the situation or you can correct by going through the Voluntary Fiduciary Correction Program which was created by the DOL. For more information on how to correct late participant contributions visit—You-have-not-timely-deposited-employee-elective-deferrals.

The penalties, the administrative costs and time consuming process of correcting late remittances is burdensome, so it is prudent to consistently make the 401(k) contributions on a timely basis.

Nicole Ferraro, CPA
Principal – Packer Thomas
Feel free to contact Nicole with your questions:
(330) 533-9777


Tax Related and Government Benefit Identity Theft

Identity Theft FingerprintTax related identity theft is a growing problem which affected more than 450,000 people in 2012 alone.  Tax related and government benefit identity theft is now more common than identity theft involving financial assets, such as credit cards and bank accounts.  It used to be that the “fraudsters” would obtain social security numbers (SSN’s) and other personal information via “dumpster diving” or by stealing the information from an individual’s mailbox.  No doubt this still happens.  However, the new and improved method of obtaining personal information now involves stealing SSN’s by the thousands via records obtained from hospitals, universities, nursing homes, and other similar organizations who collect this information from the individuals they serve.  Typically, tax return identity theft is perpetrated in one of two ways. The first way involves filing a fraudulent tax return with false income & tax withholding information using the SSN of another individual in an effort to obtain an illegitimate tax return refund.  The second way is for an illegal alien to use the SSN of another individual to gain employment.  At the end of the year, the employer issues the illegal alien a Form W-2 reporting income under the stolen SSN.  The illegal alien then files a tax return using this SSN.  Regardless of the method of perpetration, tax return identity theft delays legitimate taxpayer refunds because the legitimate taxpayers return, if filed after the fraudsters return, appears to be a duplicate return.  A whole host of actions then need to be taken to prove the legitimate taxpayers identity.  It can sometimes take upwards of a year to accomplish this.

So, how do you protect yourself from identity theft?  The most important step is to protect your social security number.  Only give it out when absolutely necessary and consider not giving it out at all.  Although many medical service providers request a social security number, many can and will provide services without it.  This holds true of other organizations requiring a social security number as well.  Another useful tool to protect yourself is to monitor your credit report and consider subscribing to a reputable credit monitoring organization such as LifeLock.  There are many other steps you can take to ensure the security of your personal information as well.  For more suggestions and instructions on what steps to take if you encounter identity theft, visit,-Victims-about-Identity-Theft-and-Tax-Returns-2014 .

Kimberly Murphy, CPA
Manager, Packer Thomas
Feel free to contact Kim with your questions:
(330) 533-9777