As an employer, you must pay federal unemployment (FUTA) tax on amounts up to $7,000 paid to each employee as wages during the calendar year. The rate of tax imposed is 6% but can be reduced by a credit (described below). Most employers end up paying an effective FUTA tax rate of 0.6%. An employer taxed at a 6% rate would pay FUTA tax of $420 for each employee who earned at least $7,000 per year, while an employer taxed at 0.6% pays $42.

Tax credit

Unlike FICA taxes, only employers — and not employees — are liable for FUTA tax. Most employers pay both federal and a state unemployment tax. Unemployment tax rates for employers vary from state to state. The FUTA tax may be offset by a credit for contributions paid into state unemployment funds, effectively reducing (but not eliminating) the net FUTA tax rate.

However, the amount of the credit can be reduced — increasing the effective FUTA tax rate —for employers in states that borrowed funds from the federal government to pay unemployment benefits and defaulted on repaying the loan.

Some services performed by an employee aren’t considered employment for FUTA purposes. Even if an employee’s services are considered employment for FUTA purposes, some compensation received for those services — for example, most fringe benefits — aren’t subject to FUTA tax.

Recognizing the insurance principle of taxing according to “risk,’’ states have adopted laws permitting some employers to pay less. Your unemployment tax bill may be influenced by the number of former employees who’ve filed unemployment claims with the state, the current number of employees you have and the age of your business. Typically, the more claims made against a business, the higher the unemployment tax bill.

Here are four ways to help control your unemployment tax costs:

1. If your state permits it, “buy down” your unemployment tax rate. Some states allow employers to annually buy down their rate. If you’re eligible, this could save you substantial unemployment tax dollars.

2. Hire conservatively and assess candidates. Your unemployment payments are based partly on the number of employees who file unemployment claims. You don’t want to hire employees to fill a need now, only to have to lay them off if business slows. A temporary staffing agency can help you meet short-term needs without permanently adding staff, so you can avoid layoffs.

It’s often worth having job candidates undergo assessments before they’re hired to see if they’re the right match for your business and the position available. Hiring carefully can increase the likelihood that new employees will work out.

3. Train for success. Many unemployment insurance claimants are awarded benefits despite employer assertions that the employees failed to perform adequately. This may occur because the hearing officer concludes the employer didn’t provide the employee with enough training to succeed in the job.

4. Handle terminations carefully. If you must terminate an employee, consider giving him or her severance as well as outplacement benefits. Severance pay may reduce or delay the start of unemployment insurance benefits. Effective outplacement services may hasten the end of unemployment insurance benefits, because a claimant finds a new job.

If you have questions about unemployment taxes and how you can reduce them, contact us. We’d be pleased to help.

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These days, most businesses need a website to remain competitive. It’s an easy decision to set one up and maintain it. But determining the proper tax treatment for the costs involved in developing a website isn’t so easy.

That’s because the IRS hasn’t released any official guidance on these costs yet. Consequently, you must apply existing guidance on other costs to the issue of website development costs.

Hardware and software

First, let’s look at the hardware you may need to operate a website. The costs involved fall under the standard rules for depreciable equipment. Specifically, once these assets are up and running, you can deduct 100% of the cost in the first year they’re placed in service (before 2023). This favorable treatment is allowed under the 100% first-year bonus depreciation break.

In later years, you can probably deduct 100% of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.

For tax years beginning in 2019, the maximum Sec. 179 deduction is $1.02 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount of qualified property is placed in service during the year. The threshold amount for 2019 is $2.55 million.

There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).

Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.

Software developed internally

If your website is primarily for advertising, you can also currently deduct internal website software development costs as ordinary and necessary business expenses.

An alternative position is that your software development costs represent currently deductible research and development costs under the tax code. To qualify for this treatment, the costs must be paid or incurred by December 31, 2022.

A more conservative approach would be to capitalize the costs of internally developed software. Then you would depreciate them over 36 months.

Third party payments

Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.

Before business begins

Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.

We can help

We can determine the appropriate treatment for these costs for federal income tax purposes. Contact us if you have questions or want more information.

© 2019

If your not-for-profit owns its own facility, it likely will have more control of work space than if you lease. However, ownership carries risks — and leasing can provide several advantages. If you’re trying to make a buy-or-lease decision, be sure to weigh the following factors.

Equity in owning

Buying a facility allows your nonprofit to build equity, and it can stabilize your cash flow and presence in the community. Owning can also be important if you want to accommodate special needs and configure and equip your space to certain specifications. For example, a physical therapy center might need to buy a facility because it plans to construct a swimming pool and locker rooms.

But when buying, it’s easy to bite off more than you can chew. Some organizations fail to project negative scenarios such as a funding drop or local government assessments. And there’s the risk of plummeting resale values. If you bought, what would happen if the neighborhood surrounding your building changed or if it were no longer near your client base?

Flexibility in leasing

Leasing office space or a facility can offer more flexibility than ownership. Say you’re uncertain about your client base and your organization could experience substantial growth or decline. It’s far easier to move when your lease expires than to sell real estate.

Perhaps you can secure an attractive long-term lease, one that guarantees only modest rent increases, and allows (and sometimes finances) reconfiguring the space to meet your needs. Another lease plus: Most repair headaches — and expenses — will be your landlord’s.

On the other hand, monthly rent can take a big bite from your budget with little return, and the cost can increase dramatically when it’s time to renew your lease. Fire insurance and real estate taxes also can be the renter’s responsibility if you have what’s called “a triple net lease.”

Comparing costs

Sometimes it’s difficult to decide whether to lease or buy the space you need for operations. In such cases, cost analysis can help you make an informed decision.

On the buying side, consider the property’s:

• Purchase price and financing terms, such as interest rates and closing costs of the new facility,
• Expected useful life for your operation, and
• Estimated value when you expect to sell it.

On the leasing side, gather information on the projected lease term, rate and renewal options available. Also estimate how much interest could accrue on the capital you would spend on a down payment, if you invested that money. Contact us for help crunching the numbers.

© 2019