Category Archives: Uncategorized

Protect Against Malware

Foreign malware attacks on U.S. routers have been discovered to be more widespread than initially thought. The FBI recommends owners of small offices and home office routers to take proactive measures.

Contact your Internet Technology (IT) advisor to ensure your home and business routers are protected from harmful attacks and viruses. If you’re tech savvy, you may be able to take the following precautionary steps:

  • Reboot your router to temporarily disrupt the malware.
  • Consider disabling remote management on the router settings.
  • Change your router password to a new, stronger password with random letters, symbols and numbers.
  • Get into the habit of changing your password every 90 days.
  • Be sure your network devices are upgraded to the latest versions of the router firmware.

Consider completing these tasks by scheduling a visit or call your IT advisor with any questions. Being pro-active and taking the necessary steps to safeguard your home and business router is one of the best ways to protect against foreign malware attacks.

When Lack of Control is a Good Thing

When it comes to estate and wealth transfer planning, timing is everything. If you take the necessary planning steps when tax and market conditions are optimal, you can ensure that your wealth is passed on to your beneficiaries in a tax advantaged manner. In 2012, with legislative uncertainty related to future estate and gift tax exemptions (the amount that can be passed on before estate tax arises) and the estate tax rate, many estate planners wisely counseled taxpayers to take advantage of favorable conditions and shield their estates from potential tax increases. After significant debate, Congress moved to maintain favorable estate tax conditions, extending a great opportunity for planning.

“Permanent” Changes Don’t Eliminate Urgency

After a period of uncertainty over the future of exemption amounts and estate tax rates, in the end, the American Taxpayer Relief Act of 2013 (“The Act”) didn’t actually change the estate tax landscape significantly. The estate tax exemption, lifetime gift tax exemption, and generation skipping transfer tax exemption were all set at $5.25 million for 2013 and indexed for inflation for later years. The exemption will increase to $5.34 million in 2014 and continue to increase with inflation in future years barring legislative change. The Act did raise the top estate tax rate from 35 percent to 40 percent, but the rate remained far below the 55 percent rate from the 1990’s that was discussed as a possibility.

What does the new law mean for taxpayers? First, it means that conditions are still historically favorable for estate and gift tax planning. Second, it doesn’t necessarily mean anything for the future beyond the next few years. Taxpayers should understand that new legislation could alter the estate tax climate at any time – making estate planning just as important and urgent as ever.

Rising Real Estate Values Can Provide Opportunity

The real estate market in South Florida has been in a steady rebound in recent years following the bubble and subsequent collapse in 2008, but according to the Case-Schiller index, average values are still about 41 percent below the peaks set in 2006. While projecting future real estate conditions remains a challenge, current real estate values could actually represent a significant opportunity for estate planning. By utilizing what is commonly called “estate freeze,” property owners may be able to transfer assets now rather than later, locking in the current value of the assets for transfer values and excluding future appreciation from estate tax at the donor’s death. This can potentially mean using less of available exemptions, and shielding significant wealth from gift and estate tax.

To get the process started, you should first get an estimated current value inventory of your asset portfolio. The next step requires determining which assets are most likely to appreciate in value. If $5 million worth of real estate is transferred now, and later appreciates to $7.5 million, only $5 million of the $5.25 million exemption would be used, leaving room for additional gifting. The same property, if transferred at a later date at a value of $7.5 million, could result in approximately $900,000 in estate tax liability. (($7.5 million – $5.25 million exemption) x 40% estate tax rate = $900,000 tax liability.)

In Estate Planning, Lack of Control can be a Good Thing

Whether you are talking about your business, your assets or your temper, the words “lack of control” generally carry a negative connotation. In the world of estate planning, the exact opposite is often true. That’s because valuation discounts can reduce the taxable value of certain types of assets when only a fractional interest is passed on to a specific party or entity. By giving a fractional interest in an asset, an estate may be able to reduce the tax value of that gift significantly, shielding significant asset value from estate tax.

There are two primary types of potentially valuable discounts. Lack of marketability discount may be available when transferring less than 100 percent interest in an asset, while obtaining a minority interest discount may be possible when transferring an interest of less than 50 percent. Minority interest discount, also known as lack of control discount, generally carries a greater discount than lack of marketability alone. Both of these discounts may apply when you are moving a fractional interest of a business or real estate out of an estate.

As an example, let’s consider a married couple that jointly owns a business valued at $25 million. They want to gift a 30 percent interest to each of their two children (7.5 million each). Due to the fact that they are only giving a fractional, non-controlling interest to each child, the marketability of that minority interest may be significantly impaired. (A minority interest in a business or real estate asset to an outside party would be significantly less marketable due to the lack of control that comes with that minority holding.) A qualified valuation may substantiate a 35 percent discount in the transferred share of the business. By utilizing discounts, the value transferred for estate tax purposes would be equal to only 65 percent of the $7.5 million, or less than $5 million to each child. Instead of exceeding their combined lifetime exemption and paying significant estate tax, the couple now has flexibility to gift even more out of the estate from different assets before reaching their estate and gift tax exemption limits. With the parents now owning only 40 percent of the asset, they now have yet another opportunity for discount for estate tax purposes at death.

The potential tax benefit of the scenario above is substantial. The discounts from the initial transfers would keep the couple under their lifetime exemption limits. They would be able to transfer 60 percent of the asset, or $15 million in value, without incurring any gift tax. Without the discounts, that 60 percent share of the company would generate approximately $2 million in tax liability. When you consider that discounts may also be possible when the remaining 40 percent interest is transferred, an additional $1.5 million in savings could be realized. Use of the lack of control discount, along with current lifetime gift and estate tax exemptions, could reduce the total estate and gift tax related to the transfer of the business from as much as $6 million to approximately $2.5 million.

While these discounts can provide substantial tax savings, there are no guarantees that they will remain available indefinitely. There have been ongoing discussions in Washington about disallowing minority interest discounts on family gifting. That means this opportunity for tax savings won’t necessarily be around in the future, providing another compelling reason to sit down with a qualified estate planner sooner rather than later.

Now is the Best Time for Estate Planning

The combination of high exemptions, relatively low estate tax rates, increasing real estate values, and the possibility for discounts creates an almost perfect storm for favorable estate planning. While current conditions are almost ideal, the only certainty when it comes to estate tax law is change, making it imperative that planning take place as soon as possible. Comprehensive estate planning requires an in-depth understanding of both the family and the assets involved, so working with a trusted advisor is imperative. You will also need to coordinate numerous outside advisors during the process including estate planners, tax planners, lawyers, valuation experts and more. At Caler, Donten, Levine, Cohen, Porter & Veil, P.A., we work hard to understand our clients and to coordinate our team of advisors to bring maximum value. Give us a call today to discuss your estate planning options. We are ready to get to work to help you protect the wealth you have created.

New Repair and Maintenance Regulations Provide Compliance Risk, Opportunity

John Courtney, CPA/JD and Mike Wethern, CPA

In September 2013, the IRS issued much anticipated final regulations dealing with repair and capitalization rules under 162(a) and 263(a). The final regulations, which became effective on January 1, 2014, replaced temporary regulations issued in December 2011. The final regulations provide rules for when taxpayers can treat expenses as deductible repairs and what must be capitalized as fixed assets. What do these regulations mean for taxpayers? What immediate actions should you be taking to ensure compliance?
Compliance should be first priority

The first priority with the issuance of the final regulations needs to be compliance. Taxpayers must comply with these regulations beginning with tax years starting on or after January 1, 2014. This means that calendar year filers must now be compliant with the final regulations with regards to their treatment of capital expenditures relating to repairs and maintenance. Based on the final regulations, two critical areas of compliance should be addressed as soon as possible.

De Minimis Rules – The final regulations established a de minimis safe harbor which provides the ability to expense items under a specific dollar amount. For companies with audited financial statements, the safe harbor limit is $5,000 per invoice or per item. Companies without audited financial statements have a much lower $500 limit for the de minimis safe harbor. In order to qualify for the de minimis safe harbor, the IRS requires companies with audited financial statements have a written financial accounting capitalization policy in effect by the start of the tax year. The regulations do not dictate that companies without audited financial statements have a written rule in place, but written guidelines are highly recommended in order to establish and defend treatment of repairs as expenses under the de minimis safe harbor.

Partial Disposals – Along with the final regulations, the IRS also issued proposed regulations dealing with the partial disposal of assets. Since the temporary repair regulations came out in 2011, the IRS has allowed taxpayers to take a partial disposal of a structural asset when it is removed from service. For example, if a taxpayer replaces a roof on their building, the taxpayer would be allowed to write off the original roof when the cost of the new roof is capitalized.

Under the temporary regulations this was automatic; however, under the proposed regulations this would be considered an election. The election on the new regulations needs to be taken with a timely filed return in the year the asset was removed from service. Proposed regulations do not yet carry any authority, but if this language is retained it will limit taxpayers’ ability to take deductions for partial disposals on a retroactive basis.

The proposed regulations are planned to take effect for tax years starting on or after January 1, 2014. As such, taxpayers can still file a 3115 to take past-year partial disposals on their 2013 tax return this spring. This provides a last chance for taxpayers to clean up any partial disposal issues prior to the proposed regulations becoming permanent. Businesses should have their assets analyzed prior to filing their 2013 return in order identify opportunities and eliminate the risk of permanently losing the ability to expense previous partial disposals.
Significant Provisions

Safe harbor for small taxpayers – The final regulations allow flexibility for small taxpayers that meet specific criteria in determining how they choose to treat improvements. In order to qualify for this safe harbor, taxpayers must have gross receipts of $10,000,000 or less and the building in question must have an initial cost less than or equal to $1,000,000. Improvements, repairs or similar costs must not exceed the lower of $10,000 or 2 percent of the original cost of the building at the beginning of the tax year.

Materials and supplies – The final regulations increased the expense threshold for supplies from $100 to $200.

Routine maintenance and improvements – The final regulations also include another safe harbor for routine maintenance for real property. In order to qualify for this safe harbor, the taxpayer must reasonably expect to perform the recurring or “routine” maintenance at least once every 10 years.

Capitalization election – The final regulations also allow taxpayers to capitalize any repair and maintenance costs if these costs are capitalized for financial accounting purposes. This provides a simplification over the temporary regulations, but the tax impact is generally not favorable to the taxpayer.
Don’t Overlook Opportunities

While taxpayer and practitioner concern regarding compliance with the new regulations is justified, it is also important to note potential opportunities provided by the new regulations. Under the final regulations, assets which were previously considered capital items may now be considered repairs for tax purposes. The final regulations provide new safe harbors, increased limits and clear definitions which determine when assets may be considered repairs. Due to uncertainty regarding past IRS rules, many taxpayers previously took a conservative approach when determining which costs may qualify as repair expenses. Under the final regulations, taxpayers may go back and recapture costs previously claimed as assets and restate them as repairs. This could provide the opportunity for a large potential 3115 tax adjustment and significant savings.

Is Your Organization Prepared for ACA Compliance?

One of the many provisions of the Affordable Care Act (ACA) is a provision which requires employers of a certain size to either provide qualified health insurance plans to their fulltime employees or pay a fine. While the implementation of this provision, commonly referred to as the “employer mandate,” has been delayed, many employers still need to take immediate action to determine whether or not their business will be required to provide qualified health insurance benefits to their employees starting in the next two years. Employers with 100 or more fulltime equivalent employees will be required to provide for health insurance in 2015, while employees with 50 to 99 employees will be required to provide health insurance beginning in 2016.
Employee levels determine if your business is required to provide insurance

The employee mandate applies only to “applicable large employers,” which are defined as employers that have an average of at least 50 “full-time equivalent employees” (FTE’s) during the preceding calendar year. FTE’s are determined by adding all hours worked during the month by part-time employees (those working less than 120 hours) and then dividing that total by 120. The result is added to the number of fulltime employees (those working at least 120 hours during the month) to determine the number of FTE’s for the month. Accordingly, an employer must monitor each employee’s status each month as a full-time or part time employee, reporting this status to the IRS, and keeping the status of each employee as a part of tax records. For determining 2015 requirements, employers will be required to evaluate the number of full-time employees during 2014.

For many employers, this will be very simple to determine. They will fall safely on either side of the 50 FTE dividing line. But what about businesses whose employee count fluctuates around the 50 FTE level? How are employers with several related companies expected to account for employee levels? For these companies, answering this question correctly may not be as simple as it seems, and getting the answer wrong could be very costly.
Related entities may be treated as a single employer

For companies with simple ownership structures, employee calculations should be fairly straightforward. On the other hand, companies with related ownership will need to first determine which entities should be considered as a single employer under the ACA. Many restaurants and real estate projects have different ownership groups, where ownership may be similar, though not identical, among several “related” entities. Under the ACA, calculation of the number of FTE’s is required to be determined for “controlled groups” of companies, which means that certain related companies must be included together in a single calculation. Since the evaluation period begins in 2014, it is essential that employers with related entities determine whether or not controlled groups exist, so that they can keep correct records for the entire group. Accurately determining the number of FTE’s for related entities may require changes to recordkeeping procedures.
Workers must be properly classified as employees versus sub-contractors

Already a high priority issue for the IRS and the Department of Labor, the proper classification of workers takes on even greater significance with the implementation of the ACA’s employee mandate. Even before considering the ACA, failing to identify employer/employee relationships could result in significant problems for taxpayers. Employers that misclassify employees as sub-contractors over a significant period of time may have substantial unreported and unknown liabilities in the form of back taxes, penalties, and interest.

While compliance with employment tax and Department of Labor rules should be sufficient motivation for evaluating and correctly reporting employment relationships, the ACA’s employer mandate provides even greater incentive for employers to get employment classifications correct. An employer’s ability to correctly count FTE’s within their organization is dependent first upon their ability to distinguish employees from independent contractors. Between back employment taxes, tax penalties, interest, and ACA fines, mischaracterization of employees could lead to organizationally crippling expenses in future years. Employers should prioritize worker classification in 2014, while the status of sub-contractors should be examined, substantiated and periodically reviewed.
A proactive approach will ensure compliance

Despite the much publicized delay of the employer mandate, employers should still take a proactive approach to evaluating their compliance requirements under the ACA. Determining the number of FTE’s within an organization based on 2014 calculations is just the start. Companies that are considered applicable large employers must be prepared to provide qualified insurance coverage for full-time employees beginning January 1, 2015 or be prepared to pay significant fines. Employers that are very close to the 50 FTE dividing line may want to have a plan in place for both possibilities. Large employers will also need to ensure that their plans meet minimum requirements while also modeling future costs and developing a plan to control healthcare expenses moving forward. Potential tax implications of the ACA may also be considerable. Like most tax and compliance related efforts, compliance will be simpler and tax and organizational planning more effective when they are addressed proactively.
Update: New Treasury rule further delays mandate for certain employers

On Feb. 10, 2014, the Treasury released new rules further delaying the employer mandate for businesses with 50 to 99 FTEs. This new class of “mid-sized” businesses will now be exempt from the employee mandate until 2016. The new rules also stipulate that companies with greater than 100 FTEs will need to provide coverage for only 70 percent of fulltime employees in 2015 and 95 percent of fulltime employees in 2016 and thereafter. The extended implementation for “mid-sized” businesses and the coverage percentage requirements represent changes from the original law.

Florida Information Protection Act of 2014 Expands Data Privacy, Security and Breach Notification Law

On June 20, 2014, Governor Rick Scott signed the “Florida Information Protection Act of 2014” (FIPA) into law. The Act officially became Florida law July 1, 2014, replacing existing data breach notification law. The passage of FIPA created sweeping changes to Florida’s data breach notification law – expanding definitions of what constitutes a reportable data breach and greatly increasing the number of organizations that may be effected by the law. Below are some important aspects of FIPA that every organization that does business in Florida should know.

What is the new FIPA law?

FIPA is Florida’s new data privacy, security and breach notification law that recently replaced previous data breach notification law. It contains reporting and corrective requirements that must be complied with following a breach, as well as a proactive component that defines what companies must do to protect “personally identifiable information” (PII) that they control regardless of whether they ever suffer a breach. FIPA specifically describes requirements related to unauthorized access of data in electronic form containing PII.

FIPA obligates any company, association, commercial or governmental entity that acquires, maintains, stores, or uses PII of Florida residents to comply. Additionally, FIPA’s expanded definition of PII affects not only commercial businesses, but health care providers and health plans.

What type of information breach does FIPA cover?

One of the most significant changes brought by FIPA was the expansion of the definition of “Personally Identifiable Information” or PII. Prior to FIPA, PII included Social Security numbers, account numbers, driver’s license numbers, and credit or debit card numbers. While all of this information is still considered PII, FIPA added new types of information to the list of PII including an individual’s first name or first initial and last name in combination with any of the following:

  • A passport number.
  • Medical history, mental or physical condition, or medical treatment or diagnosis by a health care professional.
  • An individual’s health insurance policy number, subscriber identification number, or any unique identifier used by a health insurer to identify the individual.

FIPA also defines PII to include usernames or email addresses paired with passwords or security questions and answers that together would permit access to an online account. Under the new definition, a breach can occur even when traditional sensitive information has not been compromised, meaning that far more organizations will now be affected by Florida’s data security laws.

What new requirements and penalties does FIPA introduce?
Timelines and Notifications

  • FIPA requires that Florida residents be notified within 30 days of the determination of a breach (or reason to believe a breach occurred).
  • FIPA also provides content requirements for written breach notification letters to Florida residents.
  • FIPA also requires that breaches affecting 500 or more individuals in Florida be reported to the Florida Department of Legal affairs within 30 days (with an additional 15 days upon a showing of good cause).
  • Upon request by the Attorney General, organizations may also be required to provide:
    • A police report, incident report or computer forensics report.
    • A copy of the policies in place regarding breaches.
    • Steps that have been taken to rectify the breach.

Penalties

If a covered entity fails to comply with any of the required notifications or other requirements, including breach notification letters or Attorney General’s requests, severe penalties can be imposed. In the first 30 days of non-compliance, a covered entity can be fined $1,000 per day. After 30 days of non-compliance, the fine goes up to $50,000 for each subsequent 30-day period for up to six months.

What happens when third party agents/vendors experience a data breach?

When a third-party agent has been contracted to maintain, store, or process PII on behalf of a covered entity, the third-party agent must notify the covered entity within 10 days following the determination of a breach or a reason to believe the breach occurred.

Upon receiving notice of a breach from a third party agent, a covered entity must then comply with all requirements to notify affected individuals, the Department of Legal Affairs and the Attorney General.

What else does FIPA require?

In addition to creating reporting requirements and establishing fines for non-compliance, FIPA also requires covered entities to take reasonable measures to protect and secure PII. Organizations are also required to take all reasonable measures to dispose of customer records containing PII when those records are no longer going to be retained.

Does compliance with federal regulations provide an exemption from FIPA?

In some cases, compliance with primary or functional federal regulators may exempt entities from FIPA’s notification requirements – but organizations should be aware of their interpretation of this exemption. FIPA provides that a covered entity is not required to provide notification to individuals under FIPA if the covered entity provides notification in accordance with the rules, regulation, procedures, or guidelines established by their federal regulator. FIPA’s exemption to notifying individuals if a covered entity complies with federal regulatory notification requirements applies only if the covered entity actually notifies the individuals. If a federal regulator does not require notification where FIPA would, then FIPA’s exemption does not apply. If FIPA requires notification, then covered entities must notify affected individuals, whether under federal regulatory requirements or FIPA requirements. The Florida Attorney General must always be notified of any reportable breach regardless of any federal regulatory requirements.

How can you plan for FIPA compliance?

Given the extensive reach of FIPA, and the fines and even potential lawsuits which could stem from non-compliance, organizations should develop a FIPA risk assessment and compliance plan to include the following:

Determine if your organization acquires, maintains, stores or uses PII.
Perform a risk analysis to assess potential risks and vulnerabilities to the confidentiality, integrity and availability of all PII.
Take proactive steps to take reasonable measures to protect PII.
Be prepared to comply with FIPA in the event of breach or suspected breach.
Review relationships with third party agents who may handle PII on your behalf.
Encrypt all PII whenever possible.

These are not necessarily all of the steps that your organization should consider in response to the new FIPA laws. Consult a qualified advisor to create a full risk assessment, response and compliance plan.

Preparing Your Business for Sale

While most business owners meticulously plan the ongoing management of their organization, far fewer are prepared for a successful sale. Managing a business for ongoing profitability may not always be exactly the same as preparing a business to maximize value during a sale. If the sale of your company is potentially a part of your exit plan, it pays to think about your business as a transferrable asset – with a keen eye toward maximizing value.

Preparing your company for sale may be more important than you think.

If there is any possibility of selling your business now or in the future, it is important to think about the value you are building in your business. Building a successful owner-managed business is not always the same thing as building a business that will continue to create value in the owner’s absence. While an offer to purchase your business could come at any time, the current private equity and M&A climate makes it more likely than ever that you’ll find yourself talking to a potential buyer. Still, even with a hot M&A climate, the majority of private acquisitions fail, and not always because the seller decides they don’t want to sell. Too often the process breaks down due to sellers being unprepared.

Maximizing Organizational Value.

Creating organizational value requires identifying and documenting the areas that will drive value in the eyes of a potential buyer. Every organization is unique. What makes a company an attractive candidate for an acquisition depends on the nature of the business. Some acquisitions are primarily based on the physical assets of the organization. Others are technology buys, driven by intellectual property. Many purchases are driven by a desire to add personnel, future earnings or access to a new market. Continue reading