The Chapel Hill/Carrboro Chamber Of Commerce’s mission is to serve and advance the business interests of its members and to support the mission of the Chamber’s Foundation for a Sustainable Community. They host the Business After Hours sessions as a way to network within the member organizations/businesses.

This event is free for Chamber members. To join the Chapel Hill Chamber Of Commerce, and for more information, go to
http://www.chambermaster.com/directory/jsp/events/EventPage.jsp?ccid=568&eventid=1871 or go to http://www.carolinachamber.org/

The Durham Chamber will be highlighting the accomplishments of last year and speaking about all of the exciting things in store for 2012. Blackman & Sloop, CPAs, P.A. professionals will be attending for anyone who wishes to talk about their business and their business needs.

For more information, go to: http://members.durhamchamber.org/Events/details/2012-annual-meeting

Ellen S. Nash, CPA, Certified QuickBooks ProAdvisor & Michael R. McKinney, CPA, presented information on cash vs. accrual accounting, identifying the most commonly used financial reports, and teach you how to use the customization tool in QuickBooks.

For more information about the Durham Chamber of Commerce and it’s events, go to http://www.durhamchamber.org/

Blackman & Sloop CPAs, P.A. is a proud supporter of Habitat for Humanity of Durham. On November 19, members from Blackman & Sloop were present and helped to assist with building a house. Below are some of the photos from the event.

Founded in 1985, Habitat of Durham has broken ground on nearly 270 homes for local families whose housing is unsound, unsafe or overcrowded.  Habitat serves as both builder and mortgage lender.  Through no-interest loans, Habitat offers affordable mortgage payment to families that don’t qualify for traditional loans.  This is made possible through generous contributions of volunteer labor, money and materials by Habitat supporters and through the ‘recycling’ of home-owner mortgage payments.

You too can get involved in the work that Habitat for Humanity does, by investing your time, or even donating. For more information, go to http://www.durhamhabitat.org/

•    Schedule C – Sole Proprietorships
•    Schedule E – Partnerships and S-Corporations
•    Schedule F – Farming

In analyzing this tax deduction for small businesses, North Carolina enacted one rule that could limit some taxpayers.   The small business income exclusion does not include income that is considered passive income under current IRS regulations.  The taxpayer must actively manage the business in order to obtain the income exclusion on their personal income tax filing.

Married taxpayers with two business incomes could receive up to a maximum $100,000 deduction under the revised and temporary North Carolina laws ($50,000 deduction each).   For example, both husband and wife own 50% of Partnership Z, LLC and are active participants in the business.  Partnership Z, LLC reports $125,000 taxable income or $62,500 to each member at the end of 2012.  After reducing their income by $50,000 each, husband and wife would only have to pay tax on $12,500 of Partnership Z income on their North Carolina income tax return for a total of $25,000 of taxable income instead of the full  $125,000.

Using the 2011 NC income tax rates, they could save up to $7,750 in NC taxes.   It is important to note that there are many factors to take into account when planning for this income tax deduction like guaranteed payments, personal W-2 wages from S-Corp income, and bonus depreciation.  While this new law does not impact your 2011 taxes directly, planning does need to occur in order to maximize the deduction going forward.   Call our office to see how we can assist you make the most of your tax situation with this and many other changes in tax law for 2012 and beyond.

Blackman & Sloop is a full-service CPA firm headquartered in Chapel Hill, North Carolina and is actively involved in auditing, taxation, management consulting, financial planning, and related services. The firm directs a large part of its services toward providing management with advice on budgeting, forecasts, projections, financing decisions, financial analysis, and tax developments. The firm also performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns as well as technology consulting services regarding installation and training on QuickBooks. Blackman & Sloop provides services in Raleigh, Durham, Chapel Hill, RTP, Hillsborough, Pittsboro, Charlotte, and the rest of North Carolina. To find out more please visit http://www.blackmansloop.com

Contact: CPA cpa@blackmansloop.com

QuickBooks, of course, can’t do your taxes for you. But it helps you lay some of the groundwork. Following up on last month’s column on customizing reports, we’ll look at the program’s tax-related reports and its powerful report-filtering options.

But first, you’ll need to make sure that this output will be accurate.

Describe your company accurately
Your tax entity setting should have been established when you first set up QuickBooks, but verify that you’ve specified the correct one. Go to Company | Company Information. Your Report Information is in the lower left corner. Click the arrow next to Income Tax Form Used to see what’s active.

Figure 1: Make sure that QuickBooks is set up for the correct tax entity.

QuickBooks automatically assigns some of your accounts to their matching lines on the 1040 and assorted forms and schedules; this is called tax line mapping. So when you create tax reports, related transactions will be grouped by these designations.

This can be a real time-saver – as long as you’ve specified the correct entity. If:

•    <Other/None> was selected
•    This setting is incorrect
•    You’re starting a business and don’t know which to choose…

… please contact us. If you switch entities, your existing tax line mapping will disappear and will have to be reassigned.

Dedicated tax reports
Many of QuickBooks’ general financial reports provide tax-related information. But there are some that specifically relate to the numbers that will go on your return. Go to Reports | Accounting & Taxes | Income Tax Preparation. Here’s an excerpt of what you’ll see:


Figure 2: QuickBooks automatically assigns many accounts to the appropriate tax form lines, based on your specified tax entity.

Here, QuickBooks shows you which tax lines have been pre-assigned to your accounts.  You can specify a tax form line for unassigned accounts, but this is something you should not attempt on your own. This report, though, will give you an idea of how useful your report output will be and where you’ll need our assistance.

Other reports provide tax-related data. You can access them by going again to Reports | Accountant & Taxes and clicking:

•   Income Tax Summary. This displays totals for each tax line that’s relevant to your particular tax entity. Double-click on any number, and the Tax Line By Account report appears, detailing every transaction related to every tax-related account (you could add a column for Tax Line in Display options and make this quite a useful report).
•    Income Tax Detail. This lists all individual transactions by tax form/schedule line assignment.

Paring it down
Some tax reports can be very lengthy; you may want to filter them to look at various “slices.”
Click Customize Report | Filters:

Figure 3: This window displays a powerful set of filtering options.

The options listed under Choose Filter are available on other reports; they help you set up incredibly complex searches using multiple filters.

Let’s say you want a report that displays your installation labor costs on new residential construction from the last year (you could also throw other variables in). You’d simply choose the filters from the left pane and then select related options in the next pane (usually a list). You’d want to also click on the Display tab to make sure that the appropriate columns appear.

Figure 4: You can apply multiple filters to your reports.

QuickBooks reports can shave time off of tax preparation, and filtered views help you scrutinize your data in quite creative – and very useful – ways. The program’s boilerplate reports have their place in simple examinations of your financial status, but filters are potent tools. They can facilitate the kind of deep analysis that helps you make critical business decisions.

If you have questions on this or any other QuickBooks feature, call or email us. We’re your partner and we’re here to make your business better.

Blackman & Sloop is a full-service CPA firm headquartered in Chapel Hill, North Carolina and is actively involved in auditing, taxation, management consulting, financial planning, and related services. The firm directs a large part of its services toward providing management with advice on budgeting, forecasts, projections, financing decisions, financial analysis, and tax developments. The firm also performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns as well as technology consulting services regarding installation and training on QuickBooks. Blackman & Sloop provides services in Raleigh, Durham, Chapel Hill, RTP, Hillsborough, Pittsboro, Charlotte, and the rest of North Carolina. To find out more please visit http://www.blackmansloop.com

Contact: CPA cpa@blackmansloop.com

•    Tax filing rules
•    Alimony and other support payments
•    Primary residence
•    Retirement assets
•    Other property transfers

Tax Filing Rules

Filing Status

Your marital status for tax filing purposes is set as of the last day of the year.   If you are divorced as of December 31st you must file as a single taxpayer for that year, even if you and your spouse lived together as a married couple for a portion of the year.

If you were married at December 31st the rules are more complicated, you can file married filing jointly, married filing separately, and in certain instances as head of household.  The tax rates are set so that the most favorable tax rates are for married filing jointly and the harshest tax rates are for married filing separately.

You may be able to file as Head of Household even if you were legally married on December 31st.  To file as Head of Household, you must meet all these tests:

1.    You were unmarried or considered unmarried on December 31.  You are considered unmarried if your spouse did not live in your home during the last six months of the tax year.
2.    You paid more than half the cost of keeping up a home for the year.
3.    A child or other qualifying person lived with you in the home for more than half the year for whom you or the other parent is entitled to claim the tax exemption.  (See Dependency Exemptions below)

Planning point.   Couples contemplating divorce near the end of the year should consider whether they would be better off making their divorce effective before the end of the year, allowing them to file as single taxpayers, or making their divorce effective after the end of the year, allowing them to file a joint return.  A word of caution if you are filing a joint tax return, the less financially knowledgeable party should review the tax return carefully to be certain there are no tax issues that he/she could be held responsible for in the future due to joint and several liability.

Dependency Exemptions

A dependency exemption, reduction in taxable income, of $3,700 (2011) and $3,800 (2012) is allowed for the taxpayer and each child/dependent.  The issue of which parent is allowed the exemption is often addressed in the divorce decree.  If not addressed in the divorce decree the custodial parent is allowed the exemption.  The custodial parent is the parent with whom the child lived for the greater number of nights during the year.

Even if the custody of the child is determined in the divorce decree, the parents can trade the exemption back and forth by filing, with their tax return, Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.  A word of caution however, the custodial parent can revoke the election for the noncustodial parent.  The revocation is effective in the tax year after notifying the noncustodial parent.

When there are multiple dependents divorcing parties often split the exemptions between them.  This may not be the best tax strategy as the exemption can provide a better benefit to the higher income person.

Itemized or Standard Deduction

This tax issue concerns people that will be filing using the married filing separately status.  Both tax returns need to be prepared using either the standard deduction or itemized deduction.  This can be disadvantageous if one spouse has significant itemized deductions and the other does not.  We will discuss later in this article a major source of itemized deductions, the primary residence.

However, a spouse who qualifies as unmarried (see above) and uses the head of household filing status does not lose the standard deduction if filing separately, even if the other spouse chooses to itemize. However the other spouse does lose the standard deduction if the spouse qualifying as unmarried and using the head of household filing status elects to itemize.

Child Care Credit

The parent who has custody of the children is entitled to claim a credit  from 20% to 35% of the cost of work-related child care, up to a maximum credit of $1,050 for one child and $2,100 for two or more children under the age of 13. Unlike the exemption, the child care credit cannot be traded; it is available only to the custodial parent.

Alimony and Other Support Payments

The major difference between alimony and certain support payments is that alimony can be included in the taxable income of the recipient and is deductible by the payer.  Support payments, such as child support, usually can not be included in income and therefore not deductible by the payer.  So all other things being equal, payers want as much support as possible to be in the form of alimony, and recipients want as much support as possible to be in the form of child support.

There are exceptions in both circumstances.  Payments made on behalf of a spouse for housing, medical payments, and debt relief, among other payments can be structured to be alimony payments, even though the spouse does not receive any cash.

Alimony means any payment in cash if:
1.    it is received by (or on behalf of) a spouse under a divorce decree, a separate maintenance instrument, or a written separation agreement,
2.    the instrument does not designate the payment as payment other than alimony,
3.    the spouses are not members of the same household at the time the payment is made under the instrument,
4.    there is no liability to make payments after the death of the payee spouse and there is no liability to make any payment as a substitute for such payments after the death of the payee spouse, and
5.    the payments are not treated as child support.

Payments made to the spouse before the divorce is final and payments in excess of the amounts included in the divorce agreement are not considered alimony and therefore, are not deductible by the payer and cannot be included in income by the recipient.

Including the expenses of a jointly owned home as alimony can be further complicated by the type of ownership of the home.  The following table indicates how much of your payment is alimony and how much may qualify as an itemized deduction.

Primary Residence

What to do with the primary residence is the second most contentious issue in a divorce after child custody.  Transfer of one spouse’s interest in the primary residence to the other spouse does not generate any gain or loss.  However, in many instances the primary residence may have to be sold.

Under current tax law, married filing jointly taxpayers can exclude up to $500,000 and single taxpayers can exclude up to $250,000 in gain on the sale of the personal residence, provided you meet the following tests.

1.    You owned the home for at least 2 years (the ownership test)
2.    You lived in your home as your main home for at least 2 years (the use test)
3.    During the 2-year period ending on the date of sale, you did not exclude gain from the sale of another home.

The primary issue therefore is whether to sell the house before or after the divorce is final.  The gain on the house is determined as follows: selling price less 1. expenses of the sale, 2. the original basis (typically cost) of the home, and 3. any improvements made to the home.  If the gain is less than $250,000, than the issues related to the sale from a tax perspective are eliminated.

Selling the home before the divorce allows the parties to finalize the sale of typically the most significant asset and determine if there will be any taxable gain.  It eliminates continuing upkeep of the property and it may free up cash that can be used by both parties.

Selling the home after the divorce has the opposite effect.  Mortgage payments and property taxes need to be made and the home needs to be maintained.  As indicated previously, the payments for these expenses can have an effect on alimony and support, depending on the divorce agreement.

The IRS has clarified the issue of determining the amount of gain exclusion for taxpayers that sell the house after the divorce by saying that you are considered to have used the property as your main home during any period when you owned it, and your spouse or former spouse is allowed to use it under a divorce or separation instrument. Therefore the ex-spouse that is not living in the home will still be able to meet the ownership and use tests.  As such, make certain that the divorce instrument has specific wording on this issue.

Retirement Assets

The general rule is that the transfer of an individual’s interest in an individual retirement account or an individual retirement annuity to the spouse or former spouse under a divorce decree or under a written instrument incident to such divorce is not considered a taxable event.  Many divorcing people however need to access the retirement funds for living expenses.  Any distribution from a retirement account is subject to federal and state income taxes and may be subject to a 10% federal penalty if the recipient is under age 59 ½.  However, there are several withdrawal methods that can be used to avoid the early withdrawal penalty.

•    If withdrawals are made in substantially equal periodic payments, for a period of five years or until the recipient reaches the age of 59 ½, whichever period is longer, the early withdrawal penalty does not apply.  The IRS has defined periodic payment as at least one payment a year and they have also provided three different methods for determining a substantially equal periodic payment.

•    Similar to the substantially equal periodic payments method, is to make the distributions as an annuity.  This option is only available for funds within Individual Retirement Accounts (IRA).  The concern many people have about annuities is that the investment return is usually fixed and could be less than if the person had control over the assets.

•    With most employer retirement plans, money cannot be removed from the account while the employee still works there. A Qualified Domestic Relations Order (QDRO) as part of a divorce settlement is one of the few exceptions.  The tax code provides that money being transferred under a QDRO can go directly to the recipient spouse without being subject to the early withdrawal penalty.  This is also true for distributions from and Individual Retirement Account (IRA) covered under a QDRO. The payment can also be split, with a portion of the funds being rolled into the ex-spouse’s IRA and the remainder being distributed, with none of the funds being subject to the early withdrawal penalty.

Planning point.  All of the distributions not rolled over into an IRA are subject to income taxes, so it is important to review the effect of the distribution on your current and future year income taxes.

Other Property Transfers

Generally no gain or loss is recognized for property transferred to a spouse, or former spouse if incident to the divorce. The transfer is treated as a gift with the transferee having the transfer’s basis.  There are exceptions to the general rule as follows:

1.    The spouse or former spouse is a nonresident alien.
2.    Transfers to a trust.
3.    Certain stock redemption.

The following table provides some guidance on the tax treatment for certain transferred property.

Transfers of property are the most difficult tax area and both parties need to understand the consequences so please consult your tax adviser as soon as possible.

As you can see there are many tax issues that need to be addressed before finalizing any agreement.  Please contact us if you need any assistance or have any questions.

Blackman & Sloop is a full-service CPA firm headquartered in Chapel Hill, North Carolina and is actively involved in auditing, taxation, management consulting, financial planning, and related services. The firm directs a large part of its services toward providing management with advice on budgeting, forecasts, projections, financing decisions, financial analysis, and tax developments. The firm also performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns as well as technology consulting services regarding installation and training on QuickBooks. Blackman & Sloop provides services in Raleigh, Durham, Chapel Hill, RTP, Hillsborough, Pittsboro, Charlotte, and the rest of North Carolina. To find out more please visit http://www.blackmansloop.com

Contact: CPA cpa@blackmansloop.com

There are numerous scenarios that necessitate the use of credit memos, including overpayment, order cancellations and bad debt write-off. It’s critical that these are entered correctly. If they aren’t, you may lose a lot of the time that QuickBooks helped you save as you try to chase down a few dollars.

Figure 1: QuickBooks helps you identify refunds quickly.

Sending money back

Let’s say a customer pays for an order but cancels before it ships. You could:

•    Apply the balance to an existing invoice
•    Keep it as an available credit
•    Issue a refund

Click Customers | Create Credit Memos/Refunds. Select the correct customer and job (and A/R account, if you have more than one). Enter the items just as they appear on the invoice. When you’re finished, click Save & New.  The Available Credit window opens, displaying your options:

Figure 2: The Available Credit window displays your credit balance options.

You would select Give a refund and click OK. The Issue a Refund window opens and should already be filled in. If everything is correct, click OK. The refund check has now been entered in the checking register, ready to be processed.

WARNING: If the invoice was paid with a credit card, it gets complicated. Your instructions will depend on whether you are using Intuit Merchant Service for QuickBooks or another merchant account service. You’ll also have to deal with transaction fees. We can help you deal with this.

Other refund options

If the customer has open invoices, you may want to choose Apply to an invoice in the Available Credit window. A list opens; just select the correct invoice. Or if you want to have those extra funds available for other invoices but don’t want to apply them immediately, click Retain as an available credit.  When you want to use them, click the Apply Credits button in the lower right corner of the invoice.

Figure 3: When issuing a refund, QuickBooks can hold those funds to be applied to invoices later.

Sometimes, customers overpay an invoice or statement charge, or make a down payment for which there is no invoice. This is easy to fix. Open the Customer Payment screen (Customer Center | Transactions | Received Payments) and double-click the related payment. In the screen’s lower left corner, you’ll see this:

Figure 4: Click the correct option here.

Click the correct button, then Save & Close. The Issue a Refund window opens; you’d treat it the same way you did when you dispatched a return refund.

Another use

You can also use credit memos to write off bad debt if you are using the accrual method of accounting.

If you don’t already have a Bad Debt item in your item list, set up a new item as an Other Charge. Name it “Bad Debt” and match it to the correct account.

Open the Credit Memo window and select the customer, then select Bad Debt as the item. You’ll get a message saying that the item is associated with an expense account; click OK. Enter the write-off amount minus sales tax if taxable (be sure the Tax column is correct) and click Save & Close.

WARNING: Enter two lines on the credit memo if it combines both taxable and non-taxable items (both charged to the Bad Debt account), one for each type. Be sure that the Tax Columns are correct.

The Available Credit window opens. Select Apply to an invoice. Put a check mark next to the correct one and click Done.

Make refunds make sense

It seemed easier in the days when you just wrote a check for a refund or made an entry in a paper ledger, didn’t it? Using QuickBooks credit memos, though, helps you maintain records that follow standard accounting procedures and simplifies our understanding of your files. We’ll be glad to help you make sure that this sometimes-complex task is done right from the start.

Blackman & Sloop is a full-service CPA firm headquartered in Chapel Hill, North Carolina and is actively involved in auditing, taxation, management consulting, financial planning, and related services. The firm directs a large part of its services toward providing management with advice on budgeting, forecasts, projections, financing decisions, financial analysis, and tax developments. The firm also performs review and compilation services and prepares not-for-profit, corporate, individual, estate, retirement plan, and trust tax returns as well as technology consulting services regarding installation and training on QuickBooks. Blackman & Sloop provides services in Raleigh, Durham, Chapel Hill, RTP, Hillsborough, Pittsboro, Charlotte, and the rest of North Carolina. To find out more please visit http://www.blackmansloop.com

Contact: CPA cpa@blackmansloop.com

The Orange County Rape Crisis Center works to stop sexual violence and its impact through support, education and advocacy.

Blackman & Sloop is a sponsor for the Center’s 24th Annual Holiday Auction. This years event will feature a silent auction, dinner, dessert auction, and live auction.

For more information or to donate to the Orange County Rape Crisis Center, please go to: http://www.ocrcc.org/auction.html or http://www.ocrcc.org/index.html

The DOL website states that a 1 percent increase in plan expenses paid from plan assets can, over 35 years result in a 28 percent decrease in the ultimate account balance!

For years, many plan sponsors have struggled to truly understand the total expenses paid from their plan’s assets. In addition to so-called direct expenses, where the plan clearly is paying for a product or service, most plans also incur what are commonly referred to as hidden or indirect fees (e.g., 12b-1 fees, sub-transfer agent fees, etc.). These fees are deducted directly from the investment earnings and generally have not been separately and clearly disclosed. When carefully reading service agreements and other documents related to plan investments, sponsors should be able to determine the extent of those fees. The challenge has been that the documentation tends to be voluminous and in very fine print making it difficult to fully comprehend. In addition, the various fees and expenses may not be disclosed in a single section but are likely spread throughout the often lengthy document.

In order to increase plan sponsor/fiduciary and participant awareness and understanding of all plan expenses and fees, the DOL has finalized related regulations. Although intended to be the last piece in this puzzle, the regulations regarding the Form 5500, Annual Return/Report of Employee Benefit Plan, added a revised Schedule C, Service Provider Information, to the filing requirements. Schedule C requires that anyone providing services to the plan disclose for reporting purposes not only the direct fees they receive from the plan but also any indirect fees received. For example, the plan may pay a quarterly fee to the plan’s corporate trustee – a direct fee – and then the trustee may pay some of that fee to an investment manager who handles the plan’s investments – an indirect fee. Both of these fees are generally required to be disclosed on Schedule C.

So how do plan sponsors/fiduciaries educate themselves about the fees and expenses being paid from their plans? That is where the DOL regulations under ERISA §408(b)(2) come into play. Originally scheduled to be effective in July 2011 and delayed until January 2012 and now further delayed to April 1, 2012, these rules require that anyone who provides services to the plan must provide, in writing, a document that clearly sets forth the services to be provided to the plan and fully discloses the costs associated with those services and any additional costs that may be incurred by the plan and in what circumstances. The costs may be disclosed using dollar amounts, percentages or through formulas. Although not required to be used, the DOL has provided a model disclosure of what the document should contain.

The service provider must also disclose whether or not they are acting as a fiduciary to the plan – a much higher commitment to the plan and its participants and beneficiaries. For any services provided after April 1, 2012, where a written agreement has not been provided, the service provider will be deemed to be a disqualified person and any transactions between the plan and a disqualified person would result in prohibited transactions.

The fees and expenses being paid from plan assets must also be disclosed to eligible employees, plan participants and their beneficiaries, as appropriate. This rule (ERISA §404(a)(5)), which has also been delayed, is now scheduled to go into effect as of May 31, 2012. In addition to the fee information that must be disclosed to all eligible employees, participants must receive information quarterly regarding the fees and expenses that were actually deducted from their accounts during the quarter. This information is required to be disclosed in dollar amounts.

It’s important to note that in September 2011, the DOL issued Technical Release 2011-03, which sets forth an interim policy allowing plan administrators to furnish information required under the final participant disclosure rule through electronic media, if certain conditions and safeguards are met.

Plan sponsors/fiduciaries should contact their service providers immediately to ensure the readiness of the appropriate disclosures in order to be in compliance with the fast approaching new requirements.

*This article originally appeared in BDO USA, LLP’s “EBP Commentator (Fall 2011)“. Copyright © 2011 BDO USA, LLP. All rights reserved. http://www.bdo.com