An example: The executive director of a service fulfillment company insists on using high quality paper for surveys, and demands control of the ordering process. This allows the executive to set up a false vendor, pay exorbitant prices for inferior paper, and then receive "loans" back from the vendor. If this was your client, would they be able to identify the fraud and properly gather evidence against the perpetrator?
Studies show that, on average, organizations lose 5% of their gross revenue to fraud. Our forensic specialists, through seminars and consultation, teach how to understand fraud and how to implement internal controls to avoid it. We also offer the expertise to uncover fraud and gather evidence.
Fighting fraud requires a clear comprehension of fraud theory. This includes understanding the Fraud Triangle: Pressure, Opportunity, and Rationalization-elements that fraud theory asserts must exist for an employee to commit fraud. It also requires proficiency in gathering evidence: seeking accounting irregularities and analytical anomalies, and compiling notes from properly conducted interviews, properly prepared and signed statements, and forensically acceptable electronic media images.
In our November 2010 Forensic Accounting Seminar, our team of specialists explored this case, teasing out the factors that allowed the fraud to take place, the investigation that revealed the extent of the fraud, and the evidence that was gathered.
In this case, another employee discovered the fraud by questioning the executive's insistence on high-quality paper and noticing a suspicious address for the vendor. The company took the correct steps to investigate: putting the executive on paid leave, interviewing employees and vendors, and creating legally acceptable disk images. After accounting for most of the fraud, they interviewed the executive, obtained a statement, notified law enforcement, and began civil proceedings. Building the case from the ground up facilitated both the civil and criminal cases.
With appropriate controls in place, organizations can minimize their risk for this kind of fraud and lessen the damage if it occurs. We look forward to opportunities to work with you in the future to explore ways to best protect your clients.
Friday, April 29, 2011
Tuesday, April 19, 2011
Deductibility of Skybox Rentals
I would like to review briefly the tax rules for deducting the expenses of renting a skybox or other private luxury box at a sporting event. Skybox rentals are subject to the general business-related entertainment expense rules as well as rules specific to skybox rentals.
In general, entertainment expenses are deductible if they are either “directly related to” or “associated with” the active conduct of your trade or business or investment activities. The direct relationship test is the harder of the two to meet. It requires an active business discussion during the entertainment event aimed at getting immediate revenue (as opposed to generalized good relations).
Accordingly, the “associated with” test is more likely to apply in the case of a skybox rental. To qualify under this test, you only need to have engaged in a substantial and bona fide business discussion before or after the entertainment event. If the discussion and entertainment event occur on the same day, the test is passed. If they are on different days, it may be more difficult to link the two, and the particular facts and circumstances involved will have to be looked at, e.g., whether a business client is from out of town, the length of the business meetings, etc.
In general, qualifying entertainment expenses are only 50% deductible. That is, if you spend $300 to entertain a client, the deduction is limited to 50% of your cost, or $150.
Special rules also apply for meals: they aren't deductible to the extent their cost is “lavish or extravagant” under the circumstances, and either you (or an employee of yours) must be present at the meal for the expense to qualify.
In addition, another limitation applies to the rental of a skybox or other private luxury box if the box is leased for more than one event. In that case, the deduction can only be based on the value of nonluxury box seats for the same event. For example, say you rent a 10-seat skybox at a stadium for $3,000 for three ballgames, where a nonluxury box seat costs $20. Ten seats times $20 for three events totals $600. Then, applying the general 50% limitation, the deduction would be $300, if the skybox was used for each event for entertainment “directly related to” or “associated with” the active conduct of your trade or business.
In determining whether the skybox rental is for more than one event, each game or other performance is counted as one event. Thus, a single lease for three or four World Series games is a lease for more than one event. On the other hand, two or more separate leases for the same event would be treated as one. That is, if three skyboxes are rented for a single game, the three leases would be treated as one, so the lease wouldn't be for more than one event. Additionally, if separate charges are incurred for food and beverages consumed in the skybox, these are deductible separately under the regular rules for such expenses rather than under the skybox limits.
In general, entertainment expenses are deductible if they are either “directly related to” or “associated with” the active conduct of your trade or business or investment activities. The direct relationship test is the harder of the two to meet. It requires an active business discussion during the entertainment event aimed at getting immediate revenue (as opposed to generalized good relations).
Accordingly, the “associated with” test is more likely to apply in the case of a skybox rental. To qualify under this test, you only need to have engaged in a substantial and bona fide business discussion before or after the entertainment event. If the discussion and entertainment event occur on the same day, the test is passed. If they are on different days, it may be more difficult to link the two, and the particular facts and circumstances involved will have to be looked at, e.g., whether a business client is from out of town, the length of the business meetings, etc.
In general, qualifying entertainment expenses are only 50% deductible. That is, if you spend $300 to entertain a client, the deduction is limited to 50% of your cost, or $150.
Special rules also apply for meals: they aren't deductible to the extent their cost is “lavish or extravagant” under the circumstances, and either you (or an employee of yours) must be present at the meal for the expense to qualify.
In addition, another limitation applies to the rental of a skybox or other private luxury box if the box is leased for more than one event. In that case, the deduction can only be based on the value of nonluxury box seats for the same event. For example, say you rent a 10-seat skybox at a stadium for $3,000 for three ballgames, where a nonluxury box seat costs $20. Ten seats times $20 for three events totals $600. Then, applying the general 50% limitation, the deduction would be $300, if the skybox was used for each event for entertainment “directly related to” or “associated with” the active conduct of your trade or business.
In determining whether the skybox rental is for more than one event, each game or other performance is counted as one event. Thus, a single lease for three or four World Series games is a lease for more than one event. On the other hand, two or more separate leases for the same event would be treated as one. That is, if three skyboxes are rented for a single game, the three leases would be treated as one, so the lease wouldn't be for more than one event. Additionally, if separate charges are incurred for food and beverages consumed in the skybox, these are deductible separately under the regular rules for such expenses rather than under the skybox limits.
Tuesday, August 31, 2010
5 Ways to Milk Preferred Tax Rates... Before Bush Tax Cuts Disappear
The end of the Bush tax cuts may just be a reality. Those rock bottom rates for long-term capital gains and qualified dividends are set to expire after 2010. Even if Congress extends the Bush cuts, they may limit the benefit for high-income earners. Here are a few things to consider:
Cash in your stock winners before 2011. If you wait until 2011, you generally will have to pay 5% more on long-term capital gains.
Harvest your stock losers after 2010. On the flip side, losses realized in 2011 may offset capital gains that will be taxed at higher rates.
Roll over or sell “small business” stock. If you own qualified small business stock, you can avoid tax on a sale by rolling over the proceeds into other QSBS stock within 60 days. Alternatively, you can exclude tax on 50% of the gain from the sale of QSBS in 2010 or 2011 , but the capital gain rate is 28%.
Take dividends in 2010. There is a urgent tax incentive to pile up dividends this year. If it makes sense, invest in stock a few months (now may be a good time) before dividends are scheduled to be paid. If you own a closely held corporation or a personal holding company, now may be the time to pay dividends.
Pass on the installment sale tax break. If it makes sense, you can elect out of installment sale treatment and have the entire gain taxed at 15% in 2010. Remember, this will accelerate your tax liability for both federal and state tax purposes.
Cash in your stock winners before 2011. If you wait until 2011, you generally will have to pay 5% more on long-term capital gains.
Harvest your stock losers after 2010. On the flip side, losses realized in 2011 may offset capital gains that will be taxed at higher rates.
Roll over or sell “small business” stock. If you own qualified small business stock, you can avoid tax on a sale by rolling over the proceeds into other QSBS stock within 60 days. Alternatively, you can exclude tax on 50% of the gain from the sale of QSBS in 2010 or 2011 , but the capital gain rate is 28%.
Take dividends in 2010. There is a urgent tax incentive to pile up dividends this year. If it makes sense, invest in stock a few months (now may be a good time) before dividends are scheduled to be paid. If you own a closely held corporation or a personal holding company, now may be the time to pay dividends.
Pass on the installment sale tax break. If it makes sense, you can elect out of installment sale treatment and have the entire gain taxed at 15% in 2010. Remember, this will accelerate your tax liability for both federal and state tax purposes.
Monday, August 16, 2010
S Corporation Tax Reduction Strategies
You may be receiving several types of payments from your S corporation, including a salary, rental payments from leasing real estate to the corporation, and a portion of the S corporation's net income. Since even minor fluctuations in these payment categories can produce differing tax results, we have the following ideas for saving taxes when extracting S corporation cash.
Income Shifting
S shareholders often attempt to minimize their compensation to increase the pass-through income to other owners (typically children in a lower tax bracket. Clearly, an owner rendering significant services to the corporation cannot unreasonably reduce salary to increase income to other shareholders. However, reasonable adjustments may be made with this objective in mind.
Reducing Compensation
Wages paid to an S corporation shareholder-employee are subject to payroll taxes. However, pass-through S corporation income is not. Thus, shareholder-employees may be able to reduce their payroll tax liability by minimizing salaries to receive additional pass-through income.
The IRS is aware of this strategy and has successfully fought it in several court cases. In some cases, the corporation issued no compensation to the key employee providing virtually all of the services the corporation sold. Instead, the shareholder-employee took corporate distributions without incurring payroll taxes. The courts recharacterized the distributions as compensation and imposed payroll taxes. Despite these IRS victories a shareholder's salary may be adjusted to the lower end of a reasonable range, especially when services are not the primary income-producing activity of the corporation.
Generating Rental Income
It is generally beneficial for an owner to rent real estate to the S corporation because any resulting net rental income is exempt from payroll taxes. But the arrangement must be reasonable because the IRS has ample authority to recharacterize rent payments as compensation or dividends to the extent they exceed market rates. S corporation shareholders using portions of their homes to perform services for the corporation (or to store corporate inventory) may lease space to the corporation. Deductions are not available for this use, but the rent is exempt from payroll taxes.
S corporation shareholders can often choose how to structure funds extracted from the corporation. While compensation and rental amounts must be reasonable, shareholders' tax results can often be improved. To discuss how S corporation distribution strategies can improve your tax situation, please give me a call.
Income Shifting
S shareholders often attempt to minimize their compensation to increase the pass-through income to other owners (typically children in a lower tax bracket. Clearly, an owner rendering significant services to the corporation cannot unreasonably reduce salary to increase income to other shareholders. However, reasonable adjustments may be made with this objective in mind.
Reducing Compensation
Wages paid to an S corporation shareholder-employee are subject to payroll taxes. However, pass-through S corporation income is not. Thus, shareholder-employees may be able to reduce their payroll tax liability by minimizing salaries to receive additional pass-through income.
The IRS is aware of this strategy and has successfully fought it in several court cases. In some cases, the corporation issued no compensation to the key employee providing virtually all of the services the corporation sold. Instead, the shareholder-employee took corporate distributions without incurring payroll taxes. The courts recharacterized the distributions as compensation and imposed payroll taxes. Despite these IRS victories a shareholder's salary may be adjusted to the lower end of a reasonable range, especially when services are not the primary income-producing activity of the corporation.
Generating Rental Income
It is generally beneficial for an owner to rent real estate to the S corporation because any resulting net rental income is exempt from payroll taxes. But the arrangement must be reasonable because the IRS has ample authority to recharacterize rent payments as compensation or dividends to the extent they exceed market rates. S corporation shareholders using portions of their homes to perform services for the corporation (or to store corporate inventory) may lease space to the corporation. Deductions are not available for this use, but the rent is exempt from payroll taxes.
S corporation shareholders can often choose how to structure funds extracted from the corporation. While compensation and rental amounts must be reasonable, shareholders' tax results can often be improved. To discuss how S corporation distribution strategies can improve your tax situation, please give me a call.
Monday, June 21, 2010
5319 New Law Provides Two Tax Benefits For Hiring Unemployed Workers
Today I am giving you an overview of two key tax incentives for hiring unemployed workers in the recently enacted Hiring Incentives to Restore Employment (HIRE) Act.
Payroll tax holiday. The new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010.
$1,000 retention credit. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
Employers are eligible to claim these tax benefits for workers hired after Feb. 3, 2010, but only wages paid after March 18 qualify for the payroll tax holiday. And, in order to give IRS more time to adjust its payroll tax forms for the payroll tax holiday, the holiday's tax forgiveness for the first quarter of 2010 will not be available until the second quarter of 2010. Some additional features of the new hiring incentives include:
• There is no minimum weekly number of hours that a new employee must work for the employer to be eligible, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.
• For workers that would otherwise be eligible for the Work Opportunity Tax Credit (i.e., another type of employment tax credit), the employer must select one benefit or the other for 2010.
• An employer that is a sole proprietorship can't claim the new tax breaks for hiring certain relatives. An entity cannot claim the new tax breaks for hiring certain relatives of its more-than-50% owner.
• An employer can't claim the new tax breaks for a worker who replaces another employee who performed the same job for the employer unless the prior employee left the job voluntarily or was fired for cause.
• For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
The Act also provides that the credit isn't available for remuneration paid to domestic workers.
If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call me.
Payroll tax holiday. The new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010.
$1,000 retention credit. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
Employers are eligible to claim these tax benefits for workers hired after Feb. 3, 2010, but only wages paid after March 18 qualify for the payroll tax holiday. And, in order to give IRS more time to adjust its payroll tax forms for the payroll tax holiday, the holiday's tax forgiveness for the first quarter of 2010 will not be available until the second quarter of 2010. Some additional features of the new hiring incentives include:
• There is no minimum weekly number of hours that a new employee must work for the employer to be eligible, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.
• For workers that would otherwise be eligible for the Work Opportunity Tax Credit (i.e., another type of employment tax credit), the employer must select one benefit or the other for 2010.
• An employer that is a sole proprietorship can't claim the new tax breaks for hiring certain relatives. An entity cannot claim the new tax breaks for hiring certain relatives of its more-than-50% owner.
• An employer can't claim the new tax breaks for a worker who replaces another employee who performed the same job for the employer unless the prior employee left the job voluntarily or was fired for cause.
• For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
The Act also provides that the credit isn't available for remuneration paid to domestic workers.
If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call me.
Wednesday, March 17, 2010
Buchbinder March 2010 Website Online Advisor
We have just posted the March 2010 issue of the ONLINE ADVISOR newsletter on our website. Here are a few headlines from that issue. To read any of these articles in full, please click here.
CONSIDER THIS NEW WAY TO USE YOUR TAX REFUND If you're receiving a tax refund this year, you can use it to buy U.S. savings bonds from the IRS.
PRIOR YEAR LAWS MAKE CHANGES TO THE TAX RULES FOR 2010 There are many changes in the tax rules this year, with the promise of much more to come. Here are some of the 2010 changes that could affect you.
CORPORATE MINUTES ARE AN IMPORTANT PART OF YOUR COMPANY'S TAX PLANNING Writing up the minutes of board of directors' meetings is not exactly a high priority for most business owners. Yet well-documented corporate minutes can provide valuable supporting evidence if your tax positions are ever questioned.
HOMEOWNERS: DON'T MAKE THESE INSURANCE MISTAKES Catastrophes, thefts, natural disasters, accidents, fires - they happen.
If such misfortunes strike, a well-researched and up-to-date homeowner's insurance policy can keep your family's finances afloat during trying times.
CONSIDER THIS NEW WAY TO USE YOUR TAX REFUND If you're receiving a tax refund this year, you can use it to buy U.S. savings bonds from the IRS.
PRIOR YEAR LAWS MAKE CHANGES TO THE TAX RULES FOR 2010 There are many changes in the tax rules this year, with the promise of much more to come. Here are some of the 2010 changes that could affect you.
CORPORATE MINUTES ARE AN IMPORTANT PART OF YOUR COMPANY'S TAX PLANNING Writing up the minutes of board of directors' meetings is not exactly a high priority for most business owners. Yet well-documented corporate minutes can provide valuable supporting evidence if your tax positions are ever questioned.
HOMEOWNERS: DON'T MAKE THESE INSURANCE MISTAKES Catastrophes, thefts, natural disasters, accidents, fires - they happen.
If such misfortunes strike, a well-researched and up-to-date homeowner's insurance policy can keep your family's finances afloat during trying times.
Thursday, February 25, 2010
New for 2010: Roth IRA Conversions Available to Everyone!
2010 is the year when those with significant amounts in their traditional IRAs can convert and reap the tax-free growth benefits of a Roth IRA - regardless of their income level. Previously, you had to have a modified adjusted gross income (MAGI) of $100,000 or less to be eligible to convert.
There is, however, one stipulation for higher-income taxpayers - they still can't contribute to a Roth IRA. So, they won't be able to make additional contributions after the conversion unless either their economic situation or tax law changes. For 2010, the ability to contribute to a Roth IRA begins to phase out at a MAGI of $105,000 for single filers or heads of households ($167,000 for joint filers). This ability to contribute is eliminated after MAGI hits $120,000 for single filers and heads of households ($177,000 for joint filers).
Be aware that any conversion you make is subject to income tax, but for conversions made in 2010 you may report the income in two equal installments in 2011 and 2012. Thus, you'll be able to defer half of the income to 2011 and the other half to 2012. And if you're converting nondeductible contributions, you'll be liable for tax only on the account earnings. Also keep in mind that Roth IRA assets must remain in the account for at least five years and you must be at least 59 1/2 before you can withdraw earnings without incurring income tax liability and early withdrawal penalties.
There is, however, one stipulation for higher-income taxpayers - they still can't contribute to a Roth IRA. So, they won't be able to make additional contributions after the conversion unless either their economic situation or tax law changes. For 2010, the ability to contribute to a Roth IRA begins to phase out at a MAGI of $105,000 for single filers or heads of households ($167,000 for joint filers). This ability to contribute is eliminated after MAGI hits $120,000 for single filers and heads of households ($177,000 for joint filers).
Be aware that any conversion you make is subject to income tax, but for conversions made in 2010 you may report the income in two equal installments in 2011 and 2012. Thus, you'll be able to defer half of the income to 2011 and the other half to 2012. And if you're converting nondeductible contributions, you'll be liable for tax only on the account earnings. Also keep in mind that Roth IRA assets must remain in the account for at least five years and you must be at least 59 1/2 before you can withdraw earnings without incurring income tax liability and early withdrawal penalties.
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