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Tax Reform Resource Center
by H2R CPA Team
The Trump administration has released its long-awaited proposed rule to update the overtime exemptions for so-called white-collar workers under the Fair Labor Standards Act. The rule increases the minimum weekly standard salary level for both regular workers and highly compensated employees (HCEs). It also increases the total annual compensation requirement for HCEs that’s required to qualify them as exempt. In addition, it retains the often confusing “duties test.”
The Trump administration rule generally is more favorable to employers than the Obama administration’s 2016 rule, which a federal district court judge in Texas halted before it could take effect. While the latter was expected to make 4.1 million salaried workers newly eligible for overtime (absent some intervening action by their employers), the U.S. Department of Labor (DOL) predicts that the newly proposed rule will make 1.3 million currently exempt employees nonexempt. The DOL estimates the direct costs for employers under the proposed rule will ring in at $224 million less per year than under the 2016 rule. (It’s unclear whether these figures take into account payroll tax obligations.)
The current rule
The regulations regarding the overtime exemptions for executive, administrative and professional employees haven’t been updated since 2004. Under them, an employer generally can’t classify a white-collar employee as exempt from overtime requirements unless the employee satisfies three tests:
Neither job title nor salary alone can justify an exemption; the employee’s specific job duties and earnings must also meet applicable requirements.
Certain employees (for example, doctors, teachers and lawyers) aren’t subject to either the salary basis or salary level tests. The current rules also provide an easier-to-satisfy duties test for certain HCEs who are paid total annual compensation of at least $100,000 (including commissions, non-discretionary bonuses and other non-discretionary compensation) and at least $455 salary per week.
The Obama administration’s proposed rule
The 2016 rule focused primarily on the salary level test, increasing the threshold for exempt employees to $913 per week, or $47,476 per year. The levels would have automatically updated every three years beginning January 1, 2020. At the time, President Obama argued that the overtime regulations had “not kept up with our modern economy.”
By more than doubling the salary level test, the rule would have made it unnecessary for employers to even consider an employee’s duties in many cases. If the employee’s pay fell under the threshold for exemption, the duties would be irrelevant — the employee already couldn’t be exempt.
The Obama rule also would have raised the HCE threshold above which the looser duties test applies. It boosted the level to the 90th percentile of full-time salaried workers nationally, or $134,004 per year. The rule would have continued the requirement that HCEs receive at least the full standard salary amount — or $913 — per week on a salary or fee basis without regard to the payment of non-discretionary bonuses and incentive payments. However, such payments would have counted toward the total annual compensation requirement.
The Obama rule was scheduled to take effect on December 1, 2016. On November 22, 2016, however, a district court judge granted a preliminary injunction stopping the implementation. The Fifth Circuit Court of Appeals subsequently declined to review the case until the DOL issued revisions.
The latest proposed rule
The DOL’s newly proposed rule would raise the standard salary level threshold to $679 per week, or $35,308 per year. For employees whose salary exceeds this level, overtime eligibility will depend on whether they primarily perform executive, administrative or professional duties. That determination would continue to turn on various checklists of criteria, many of which can seem outdated and not reflective of today’s workplace. Moreover, they’ve long invited litigation by employees challenging their employers’ application of the criteria.
The proposed rule raises the total annual compensation requirement for HCEs to $147,414, and HCEs also must make at least $679 per week on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments. But it would allow employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the standard salary level test. This means an employee’s production or performance bonuses could push him or her over the threshold and into exempt status (assuming the salary basis and looser duties tests are satisfied).
A catch-up payment is allowed for employees who don’t earn enough in non-discretionary bonus or incentive payments in a given 52-week period to meet the HCE salary threshold and retain his or her exempt status. Within one pay period of the end of the 52-week period, the employer can make a payment of up to 10% of the total standard salary level for the preceding 52-week period. This payment will count toward only the previous year’s salary amount — it doesn’t count toward the salary amount in the year it’s paid.
The duties test isn’t the only part of the existing rules that wouldn’t change under the proposed rule. No changes are made to the overtime protections for certain categories of employees, including police officers; firefighters; paramedics; nurses; and specified non-management employees, such as production-line employees and maintenance and construction workers.
The proposed rule also leaves out the automatic adjustments to the salary thresholds that were included in the Obama rule. The DOL acknowledges, though, that such thresholds can become “substantially less effective over time.” It proposes updates every four years and solicits public comment on how best to implement these future updates.
Not a sure thing
The DOL has solicited public comments on the proposed rule and indicated it expects the finalized rule to take effect on January 1, 2020. Legal challenges are likely from both business and worker groups, though. Some have questioned whether the DOL even has the authority to base overtime eligibility on salary levels. Stay tuned for more developments.
Contact H2R CPA at 412-391-2920 or email@example.com with any questions.
by H2R CPA Team
Recent changes to federal tax law and accounting rules could affect whether you decide to lease or buy equipment or other fixed assets. Although there’s no universal “right” choice, many businesses that formerly leased assets are now deciding to buy them.
Pros and cons of leasing
From a cash flow perspective, leasing can be more attractive than buying. And leasing does provide some tax benefits: Lease payments generally are tax deductible as “ordinary and necessary” business expenses. (Annual deduction limits may apply.)
Leasing used to be advantageous from a financial reporting standpoint. But new accounting rules that bring leases to the lessee’s balance sheet go into effect in 2020 for calendar-year private companies. So, lease obligations will show up as liabilities, similar to purchased assets that are financed with traditional bank loans.
Leasing also has some potential drawbacks. Over the long run, leasing an asset may cost you more than buying it, and leasing doesn’t provide any buildup of equity. What’s more, you’re generally locked in for the entire lease term. So, you’re obligated to keep making lease payments even if you stop using the equipment. If the lease allows you to opt out before the term expires, you may have to pay an early-termination fee.
Pros and cons of buying
Historically, the primary advantage of buying over leasing has been that you’re free to use the assets as you see fit. But an advantage that has now come to the forefront is that Section 179 expensing and first-year bonus depreciation can provide big tax savings in the first year an asset is placed in service.
These two tax breaks were dramatically enhanced by the Tax Cuts and Jobs Act (TCJA) — enough so that you may be convinced to buy assets that your business might have leased in the past. Many businesses will be able to write off the full cost of most equipment in the year it’s purchased. Any remainder is eligible for regular depreciation deductions over IRS-prescribed schedules.
The primary downside of buying fixed assets is that you’re generally required to pay the full cost upfront or in installments, although the Sec. 179 and bonus depreciation tax benefits are still available for property that’s financed. If you finance a purchase through a bank, a down payment of at least 20% of the cost is usually required. This could tie up funds and affect your credit rating. If you decide to finance fixed asset purchases, be aware that the TCJA limits interest expense deductions (for businesses with more than $25 million in average annual gross receipts) to 30% of adjusted taxable income.
When deciding whether to lease or buy a fixed asset, there are a multitude of factors to consider, including tax implications. We can help you determine the approach that best suits your circumstances.
Contact H2R CPA at 412-391-2920 or firstname.lastname@example.org for assistance with your tax planning.
by H2R CPA
This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business increased by 3.5 cents, to 58 cents per mile, the highest level since 2008. As a result, you might be able to claim a larger deduction for vehicle-related expense for 2019 than you can for 2018.
Actual costs vs. mileage rate
Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.
The mileage rate comes into play when taxpayers don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.
The mileage rate approach also is popular with businesses that reimburse employees for business use of their personal automobiles. Such reimbursements can help attract and retain employees who’re expected to drive their personal vehicle extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct non-reimbursed employee business expenses, such as business mileage, on their individual income tax returns.
But be aware that you must comply with various rules. If you don’t, you risk having the reimbursements considered taxable wages to the employees.
The 2019 rate
Beginning on January 1, 2019, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 58 cents per mile. For 2018, the rate was 54.5 cents per mile.
The business cents-per-mile rate is adjusted annually. It is based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there is a substantial change in average gas prices, the IRS will change the mileage rate midyear.
There are certain situations where you can’t use the cents-per-mile rate. It depends in part on how you’ve claimed deductions for the same vehicle in the past or, if the vehicle is new to your business this year, whether you want to take advantage of certain first-year depreciation breaks on it.
As you can see, there are many variables to consider in determining whether to use the mileage rate to deduct vehicle expenses. Let us know if you have questions about tracking and claiming such expenses in 2019 — or claiming them on your 2018 income tax return.
Contact H2R CPA at 412-391-2920 or email@example.com for assistance with your tax planning needs.
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