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The Advisor - Issue 1, 2014

Posted 1:43 PM by

In This Issue:

Understanding the Responsibilities and Risks of Serving as a Trustee of a Trust
Being asked to serve as a trustee of a trust may be flattering; however, many factors should be considered in deciding whether to serve as a trustee of a trust. Mistakes can be costly, and trustees can be held liable for breach of fiduciary duty. By Jay Benjamin, CPA, JD

Don’t Bet Your Bottom Dollar
On Jan. 29, 2014, proposed regulations under Internal Revenue Code Section 752 were issued by the U.S. Treasury Department and the Internal Revenue Service, which would preclude partners of partnerships (and members of limited liability companies) from utilizing customary guarantees of partnership debt to bolster the tax basis of partnership interestsBy John Estridge, CPA

Preventing Identity Fraud
In February 2014, the Internal Revenue Service (IRS) ranked identity theft as #1 on its list of “Dirty Dozen” tax scams. From 2008 through May 2012, more than 550,000 taxpayers have been victims of Stolen Identity Refund Fraud (SIRF)By Aaron Brezko, CPA/CFF, CFE

Cost Reduction Strategies: What About Utilities?
In today’s challenging economic times, all businesses and organizations are looking for opportunities to reduce costs. As companies review expenditures, they should not overlook their utilities expense. By Scott Grotjan

 

Katz, Sapper & Miller’s The Advisor is a bi-annual newsletter that focuses on business and tax solutions for today's entrepreneur.

 

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PCORI Fee Due July 31

Posted 3:13 PM by

The Affordable Care Act created a fee called the Patient-Centered Outcomes Research Institute (PCORI) fee. This fee is to be used to fund research on medical treatment effectiveness. This fee is to be paid by both fully-insured and self-funded group health plans.

The fee is $2 per person enrolled in the plan. A person enrolled in the plan includes the participating employee, spouses, domestic partners and dependents. COBRA and retiree participants also must be counted. The fee is due based on the year-end of the plan. The filing will be due on or before July 31, 2014. The fee must be reported on IRS Form 720, “Quarterly Federal Excise Tax Return.”

If you are an employer with a fully-insured group health plan, no action is required as your health insurance carrier is required to report and pay this fee. This additional fee is most likely built into the premiums that you currently pay.

If you are an employer with a self-funded plan, you are responsible for calculating the fee, completing the Form 720 and paying the related fee.

The following plans are considered self-funded plans that are subject to the PCORI fee and the Form 720 filing requirement:

  • All self-funded group health plans, including Health Reimbursement Accounts (HRAs)
  • An HRA that is offered as part of a fully-insured group health plan – the fee is paid only on the HRA part of the plan
  • A stand-alone HRA plan
  • On-site medical clinics
  • Retiree-only group health plans
  • Employee Assistance Programs – only if the EAP provides significant medical benefits

The following plans are exempt from the PCORI fee:

  • Employee Assistance Programs – does not provide significant medical benefits
  • Individual Health Savings Accounts
  • Health and Dependent Flexible Spending Accounts
  • Stand-alone dental plans
  • Stand-alone vision plans

Upon determination that you have a self-funded plan, you must complete the IRS Form 720 (revised version dated April 2014). The form may be completed manually and mailed directly to the IRS (not required to be filed electronically). 

The fee is based on the average number of enrollees for the plan year. Most employers should be able to obtain this information directly from their benefit plan service provider(s). If you have to calculate the number of enrollees yourself, there are three methods that you may choose from in determining the average number of enrollees. The methods are as follows:

  1. The Form 5500 Method: If the plan is required to file Form 5500 and your 2013 Form 5500 is filed timely and before July 31, 2014, this method can be used. To use this method, add the number of participants at the beginning of the year (Part II, line 5 of Form 5500) to the total participants at the end of the year (Part II, line 6d) and divide the total by 2.Then multiply this total by $2.
     
  2. The Actual Count Method: This method uses the number of lives covered for each day of the plan year divided by the number of days in the plan year.
     
  3. The Snapshot Method: This method uses the total number of lives covered on a given date in each quarter of the plan year. The sum is then divided by 4.

The following sections of the Form 720 will need to be completed (assuming that the Form 720 is being filed only to report the PCORI fee):

  • Complete the top section of the form. The quarter ending is the second quarter, which is June 2014.
  • Go to Part II, line 133. The Applicable Self-Insured Health Plans line is going to be completed. In column (a), report the average number of lives covered. Multiply the number in column (a) by $2 and enter that amount. This calculated amount will also be entered in the tax column.
  • Go to Part III and enter the total tax on line 3. Show 0 on line 5 as no payments have been made towards this tax. Line 10 will show the amount due with the return.
  • Sign and date the return on the bottom of page 2.

The fee needs to be paid using the Electronic Federal Tax Payment System.

  • Mail the signed and completed Form 720 to:
    • Department of the Treasury
      Internal Revenue Service
      Cincinnati, OH 45999-0009
       
  • If you want to use FedEx, UPS or DHL, the address to send your return to is:
    • IRS Processing Center
      201 W. Rivercenter Blvd.
      Covington, KY 41011

The contents of this message are for informational purposes only. If you have any questions regarding the PCORI fee and filing requirement, please contact your benefit plan service provider or any of the following KSM advisors.

Patrick Brauer, Partner
317.844.4873         

Bernadette Fletcher, Director
317.580.2134

Karen Noel, Director
317.844.4879

Jolaine Hill, Director
317.580-2446

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IRS Notice 2014-21 on Virtual Currencies

Posted 8:33 PM by

The use of virtual currencies, especially Bitcoin, has increased significantly in recent years. This increased use has raised questions regarding the proper tax treatment of these currencies. In an attempt to clarify many of the uncertainties, the IRS has recently released Notice 2014-21, which provides answers for 16 frequently asked questions surrounding virtual currencies.

The IRS defines virtual currencies as digital representations of value that function as a medium for exchange, a unit of account, and/or a store of value. In other words, the virtual currency acts like “real money” even though it is not legal tender in any country or jurisdiction. A virtual currency is considered to be “convertible” if it has an equivalent value with an established currency, or if it can be easily substituted or exchanged for a legal tender. Bitcoin is probably the most well-known and widely used example of a convertible virtual currency today. Bitcoin can be easily traded and exchanged amongst users and can also be bought or sold for various real currencies, such as U.S. dollars and Euros. The IRS notice deals only with convertible virtual currencies and does not address any virtual currency which is not convertible.

In Notice 2014-21, the IRS starts off by stating that virtual currencies like Bitcoin are considered property, not currency, for tax purposes. Since virtual currencies are considered property, accepting virtual currencies in exchange for goods and services requires the recipient to measure their gross income by using the fair market value of the virtual currency in U.S. dollars as of the date payment was received. Additionally, when virtual currency is used to purchase an item, the taxpayer is required to report gain or loss on the disposition of the virtual currency. In order to do this, the taxpayer must first determine the basis of the virtual currency in U.S. dollars at the time of the exchange. The character of the gain or loss will be determined based on whether the virtual currency is held by the taxpayer as a capital asset. Therefore, if the taxpayer holds the virtual currency as an investment asset then it will be taxed as a capital gain or loss on its disposition. However, if the taxpayer holds the virtual currency as inventory then it will be taxed as ordinary income upon its disposition.

Some virtual currencies, such as Bitcoin, allow people to “mine” the currency. This involves users discovering new Bitcoins by solving complex math problems. When a taxpayer successfully mines virtual currency, the fair market value of the mined currency is includable in the taxpayer’s gross income for the taxable year. Furthermore, if the taxpayer is mining the virtual currency as part of a trade or business, the net earnings from the activity is considered self-employment income and is subject to the self-employment tax. Similarly, if a taxpayer is paid in virtual currency for services rendered as an independent contractor, the fair market value of the virtual currency received is subject to self-employment tax. In the case of an employer-employee relationship, the fair market value of the currency paid as wages to the employee is subject to federal income tax withholding, FICA tax and FUTA tax, and is required to be reported on Form W-2.

The IRS went on to state that when certain property payments which require information reporting to the IRS – such as rent, salaries, wages, premiums, annuities and compensation – are subject to the same information reporting standards when virtual currency is used to complete the payment. Furthermore, when a Form 1099-MISC is used to report payments of virtual currency, it should be reported using the fair market value of the virtual currency as of the date of the payment.

Finally, the IRS dictated that taxpayers who have not treated past virtual currency transactions in a manner that is consistent with Notice 2014-21 may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions and failure to report virtual currency transactions in a correct and timely manner may be subject to accuracy-related and information reporting penalties. However, the IRS does note that penalty relief may be available to taxpayers who can show that the underpayment or failure to properly file information on returns is due to reasonable cause. 

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Time is Running Out: Patient-Centered Outcomes Research Institute (PCORI) Fee Due July 31

Posted 9:05 PM by
The PCORI fee is due July 31, 2014, from health insurers and the plan sponsors of self-insured plans. The fee is paid annually using Form 720, Quarterly Federal Excise Tax Return. Please note that electronic filing is available, but not required. Payment will be due at the time the Form 720 is due.
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Proper Tax Treatment of Ambulatory Surgery Center Income - A Complicated Matter

Posted 9:53 PM by
How do you determine whether a physician's income from an Ambulatory Surgery Center (ASC) should be treated as passive income or active income on an individual income tax return? There is no one-size-fits-all answer to the question of how to treat ASC income, but below are some of the key issues to think about when considering whether ASC income should be passive or active.
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20 Year Tax Abatements – A Good Idea?

Posted 4:56 PM by
Things are transpiring fast and furiously at the Indiana State House. One possible spin-off of the current push to overhaul business personal property tax is to provide local governments the authority to award tax abatement up to 20 years. My first inclination when I hear a proposal like this is to consider whether it’s a good idea or a bad idea.
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Indiana EDGE Credit in Jeopardy

Posted 5:00 PM by
When it comes to the Indiana legislature, the conventional wisdom is that lawmakers are not inclined to take on too many big issues during a short legislative session (such as this year). Someone forgot to share that message with the only people who matter: Indiana legislators.
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How to Reconcile the Difference between Gross Receipts and Receipt Reported on Form 1099-K

Posted 7:56 PM by
With the start of tax-filing season, restaurant owners may have received (or should soon be receiving) IRS Form 1099-Ks from most of the Payment Processors they used during 2013. The Form 1099-K reports the gross proceeds received from Payment Processors, over the course of the year, which includes credit card companies, PayPal, Square, and similar organizations.
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Report Details Effects of Personal Property Tax Law Changes

Posted 1:00 PM by
As Governor Pence and members of the Indiana State legislature continue to tackle the issue of personal property taxes, the Indiana Fiscal Policy Institute recently released a report detailing both major and insignificant impacts of the tax. Specifically, the report claims that taxes on equipment have little effect on decisions for businesses to relocate to other states.
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Manufacturing Leads the Way for Indiana

Posted 2:49 PM by
The Indiana Manufacturers Association's (IMA) Legislative Briefing, held January 15, 2014, highlighted the success of the manufacturing industry in Indiana. Currently, manufacturing is leading the state in several  categories including: direct employment, gross state product, wages and benefits.
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