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PayTech December Newsletter

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 Welcome to PayTech’s December Update

Market Update

Say goodbye to the recession and keep an eye on slow, steady growth for the state and nation in 2016. That’s what experts said today at the 52nd annual Economic Forecast Luncheon co-sponsored by Arizona State University’s W. P. Carey School of Business and JPMorgan Chase.
Four experts delivered a comprehensive overview of what’s happening in the state and national economies, as well as the stock market and housing market before 750 guests at the Phoenix Convention Center today. One key take-away: a variety of indicators point to a pretty solid and improving Arizona economy.

“The gains we experienced in 2015 are setting the stage for continued advances in the year ahead,” said Research Professor Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W. P. Carey School of Business. “Relative to the majority of other states in the nation, Arizona’s economy will appear quite solid. But compared to long term historical growth during past decades, the gains will be somewhat below average.”

Personal income in 2016 is projected to exceed 5.0 percent growth for the first time since 2011 as wages, employment, and population all continue to increase. Arizona’s non-farm employment is expected to grow 2.6 percent. In fact, in 2016, Arizona will be on track to finally replace all jobs lost during the recession. However, the mix of employment in 2016 will be different with knowledge jobs (professional and business services, healthcare and finance) accounting for nearly one of half the new jobs, while manufacturing and government barely grow.

“Though the 2.6 percent rate is below the long-term average of 4.2 percent, Arizona will likely emerge as one of the top 10 fastest for job creation in 2016,” said McPheters. McPheters also estimated that population growth could go up from an anticipated 1.6 percent in 2015 to 1.7 percent next year. Though this is only half of the historical average for the state, the rate compares favorably with the nation and neighboring states.

The fundamentals of the US economy are also sound according to Charles Plosser, former President and CEO of the Federal Reserve Bank of Philadelphia. Despite low inflation and international uncertainties, the medium term outlook remains positive he believes.
“I anticipate the economy will continue to expand at around 2.5 percent. Inflation will gradually move back towards 2 percent and the labor market will continue to strengthen,” said Plosser. “Though the worst of the economic crisis is now passed, the Fed must now face the challenges of normalizing policy.”

Plosser notes the economy is on a firm foundation with consumer finances in much better shape than they have been in a long time. Strong consumer spending has contributed to solid growth for the last two years, growing above 3 percent in every quarter but two of the last eight quarters. He sees this and other fundamentals in place for continued economic expansion.
The labor market continues to make steady gains in many dimensions such as 2.8 million workers added to non-farm payrolls over the last year and the unemployment rate falling to 5.0 percent to 5.7 percent a year ago and 7.2 percent two years ago.

He expects for real business investment to continue to remain soft relative to historical experience due to uncertainty, and policy uncertainty in particular.

“Monetary policy is arguably more accommodative today than it was at the height of the financial crisis or deepest point of the recession. Fortunately, the US economy is no longer in crisis and it has come a long way from the depths of the recession,” said Plosser. “ It is time to ‘get on with moving policy from crisis levels. The US economy is well-positioned to withstand a modest increase in rates, which is consistent with the historical record of Fed policymaking and with the rules that have been found to provide good policy outcomes across a wide range of theoretical models.”

James Glassman, managing director and senior economist for JPMorgan Chase & Co., who offered comments on the financial markets, agrees that the seven-year span of near-zero short-term interest rates likely is coming to an end as the Federal Reserve prepares to normalize its federal funds rate target gradually over the next several years. He expects financial markets are unlikely to be disrupted with changes from the Fed being made gradually.
“Financial markets will face bigger challenges down the road when central banks contemplate selling the assets that they accumulated as a result of large-scale asset purchases,” said Glassman. “That day may come sooner than many anticipate as the global recovery strengthens and may throw a few curve balls into the evolution of the interest rate yield curve.”
Though the stock market was prompt in anticipating a normal economic recovery and valuations are back to normal relative to current earnings, Glassman notes that the market momentum may now shift onto a slower trajectory as the focus shifts to the longer-term fundamentals, which remain promising.

He also notes:

  • Corporate credit rates: The state of business credit is exceptionally good. Credit spreads have narrowed with business default rates very low and financial stress light.
  • Equities: The seven-year run-up in the equity market may be in the process of downshifting onto a slower trajectory.
  • Commodities: The extraordinary strength of commodity prices in the past decade appears to be a reflection of the unique nature of China’s economic development. But with China’s economy now gradually slowing, commodity prices likely are merely reverting to historically more normal levels that were seen in the decades prior to 2001

Elliott D. Pollack, chief executive officer of Scottsdale-based economic consulting firm Elliott D. Pollack and Company, discussed the Arizona real estate market. Although the state continues to experience a dramatic slowdown in the number of people moving into it, the real estate markets, with few exceptions, are experiencing healthy growth.

“Make no mistake about it, this has been a mediocre recovery nationally, in the state and in the Greater Phoenix area relative to history. That being said, we are having a dramatic recovery in new single-family housing based on what is normal for this cycle,” explained Pollack. “This will be the best year for single-family housing since 2007 and the outlook for 2016 is more positive.”
The apartment market also is very strong. The demographics for apartments, including millennials who will stay in apartments longer, have probably never been stronger. Vacancy rates are as low as any time since 1999 and are likely to stay low despite the fact that the number of units in the pipeline will be increasing over the next couple of years.

Currently, office vacancy rates are 20.1 percent. However, this is deceiving with certain markets within Greater Phoenix, including downtown Scottsdale and downtown Tempe, short of space. Rents in these markets are rising rapidly. There is also a problem in terms of certain types of space such as collaborative space with high parking requirements.

Industrial vacancy rates continue to decline, but the market is both bifurcated and fickle. Big box has done well, but the small entrepreneurial or construction-related user has been slow to return to the market en masse. Thus, the multi-tenant market has yet to recover. As for retail, absorption continues to be strong relative to the post-2007 world.

Payroll Update

The Internal Revenue Service today announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2016. In general, the pension plan limitations will not change for 2016 because the increase in the cost-of-living index did not meet the statutory thresholds that trigger their adjustment. However, other limitations will change because the increase in the index did meet the statutory thresholds.

The highlights of limitations that changed from 2015 to 2016 include the following:

• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $184,000 and $194,000, up from $183,000 and $193,000.

• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000. For singles and heads of household, the income phase-out range is $117,000 to $132,000, up from $116,000 to $131,000.

• The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,500 for married couples filing jointly, up from $61,000; $46,125 for heads of household, up from $45,750; and $30,750 for married individuals filing separately and for singles, up from $30,500.

The highlights of limitations that remain unchanged from 2015 include the following:

• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $18,000.

• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,000.

• The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

• The deduction for taxpayers making contributions to a traditional IRA is phased out for those who have modified adjusted gross incomes (AGI) within a certain range. For singles and heads of household who are covered by a workplace retirement plan, the income phase-out range remains unchanged at $61,000 to $71,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase out range remains unchanged at $98,000 to $118,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

• The AGI phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Below are details on both the adjusted and unchanged limitations.

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost-of-living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
Effective January 1, 2016, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remains unchanged at $210,000. For a participant who separated from service before January 1, 2016, the limitation for defined benefit plans under Section 415(b)(1)(B)

is computed by multiplying the participant’s compensation limitation, as adjusted through 2015, by 1.0011.

The limitation for defined contribution plans under Section 415(c)(1)(A) remains unchanged in 2016 at $53,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2016 are as follows:

The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $18,000.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains unchanged at $265,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $170,000.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5-year distribution period remains unchanged at $1,070,000, while the dollar amount used to determine the lengthening of the 5-year distribution period remains unchanged at $210,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $120,000.

The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $6,000. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $3,000.

The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, remains unchanged at $395,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $600.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $12,500.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $18,000.

The compensation amount under Section 1.61-21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation remains unchanged at $105,000. The compensation amount under Section 1.61-21(f)(5)(iii) remains unchanged at $215,000.

The Code provides that the $1,000,000,000 threshold used to determine whether a multiemployer plan is a systemically important plan under section 432(e)(9)(H)(v)(III)(aa) is adjusted using the cost-of-living adjustment provided under Section 432(e)(9)(H)(v)(III)(bb). After taking the applicable rounding rule into account, the threshold used to determine whether a multiemployer plan is a systemically important plan under section 432(e)(9)(H)(v)(III)(aa) is increased in 2016 from $1,000,000,000 to $1,012,000,000.

The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2016 are as follows:

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $36,500 to $37,000; the limitation under Section 25B(b)(1)(B) is increased from $39,500 to $40,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $61,000 to $61,500.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $27,375 to $27,750; the limitation under Section 25B(b)(1)(B) is increased from $29,625 to $30,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $45,750 to $46,125.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $18,250 to $18,500; the limitation under Section 25B(b)(1)(B) is increased from $19,750 to $20,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $30,500 to $30,750.

The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,500.

The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) remains unchanged at $98,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) remains unchanged at $61,000. The applicable dollar amount under Section 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $183,000 to $184,000.

The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $183,000 to $184,000. The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $116,000 to $117,000. The applicable dollar amount under Section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.

The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under Section 430(c)(2)(D) has been made is increased from $1,101,000 to $1,106,000.

HR Update

IRS Is on a Messaging Mission: Make ACA Reporting Top-of-Mind. The IRS is in education overdrive to help HR professionals pinpoint needed compliance information as they get ready to distribute the new Affordable Care Act (ACA) forms due to employees at the end of January-at the same time W-2s are distributed.

From traditional outreach methods such as website expansion and bulk e-mail to newer sharing options with social networking on Twitter and Tumblr, IRS messages about Forms 1095-C and 1094-C reporting responsibilities are designed to get the word out-and to get feedback in.

At the center of the ACA fact-spreading campaign is a section on the IRS website published in mid-September 2015: ACA Information Center for Applicable Large Employers (ALEs). The goal, according to Bill Cressman, chief of technical communications with the IRS’s ACA Communications Office, is to catch employers’ attention and help them focus on next steps.

“The majority of employers fall below the workforce size threshold for the provisions that apply to applicable large employers,” Cressman said, referring to employers with 50 or more full-time employees, including full-time equivalents. “But many employers who are an ALE may not see themselves as an ALE. Our job is to raise awareness of the information reporting requirements and get their attention.”

“We recognize we are being repetitive in the information messages that we’re getting out for employers. But the idea of just getting more and more out there is to give as much opportunity as possible for employers to come across this information and then start” preparing, Cressman added.

The Two Sides of ACA Preparation

As HR professionals prepare for ACA reporting and seek guidance from the IRS, the IRS is seeking feedback from employers on how the reporting process can be improved.

For employers:
As covered in the SHRM Online article Ready or Not, ACA Forms Due to Employees by Jan. 31, HR professionals have concerns about the ACA form beyond identifying which employees must receive a 1095-C form documenting their health benefits, and coordinating the production and submission of 1095-C forms.

Beyond what is required for regulatory compliance, HR professionals must see to a communications schedule that lets employees receiving a 1095-C form know what the new form is, and how they must use it to complete Line 61 of their individual tax returns.

For employers subject to the ACA reporting requirements, HR professionals and business owners should now be gathering data for the first quarter 2016 filing deadlines. For details, see the SHRM Online article ACA Reporting Requirements: Tips for What’s Ahead in 2016. Additional resources can be found at the SHRM Online Health Care Reform Resource Page.

For the IRS:
The IRS is seeking feedback on the user-friendliness of the new processing system specific to ACA returns. The system is called AIR, an acronym that stands for Affordable Care Act Information Returns.

An entire section of the IRS ACA website is devoted to this new system because ACA returns submitted electronically will not be accepted by the existing system, familiar to businesses that e-file: FIRE (Filing Information Returns Electronically).

Employers submitting copies of 250 and more 1095-C forms must e-file. The same requirement applies to coverage providers, who are required to produce 1095-B forms for recipients of their insurance.

Survey for ACA E-Filing System: Frequent Feedback Encouraged

To gather technical feedback, the IRS launched a survey in October 2015 directed at employers and coverage providers that intend to e-file on their own, and at any organization intending to e-file on their behalf.

“The thought behind the readiness survey is to find out where coverage providers and employers are getting hung up: Is it at a very high level that they don’t understand? Or is it in the weeds?” Cressman said.

Among the potential “weeds” is that XML (Extensible Markup Language) is the only file format that the ACA returns processing engine will accept. In this text-based format, particular attention needs to be paid to spaces, punctuation and case sensitivity. Less complicated formats such as PDFs and Excel-based files cannot be transmitted through the AIR system.

“We encourage employers and the companies that are assisting them to visit the survey and visit it often,” Cressman said. “There’s a very clear intent to take the temperature of where readiness is at, in real time, as we go through this process.”

High Level: Alerts for Health Care Tax Tips

The IRS also is steadily adding employer-focused tips to its health care tax tip series. “These tax tips are to raise the awareness that you may have a need to dig deeper,” Cressman said.

Each easy-to-read tip leads to a page with more details. Recent tips include:

* Understanding Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, Health Care Tax Tip 2015-72, November 2015.

* ACA and Employers-Know if Coverage You Offer Meets Requirements, Health Care Tax Tip 2015-68, October 2015.

* Mark Your Calendar Now: 2016 Reporting Deadlines for Employers and Health Coverage Providers, Health Care Tax Tip 2015-64, October 2015.

* The Time Is Here: Reporting Requirements for Applicable Large Employers, Health Care Tax Tip 2015-62, October 2015.

* How Coverage You Offer (or Don’t Offer) May Mean an Employer Shared Responsibility Payment for Your Organization, Health Care Tax Tip 2015-59, September 2015.

* The Importance of Workforce Size Under the Employer Shared Responsibility Provisions, Health Care Tax Tip 2015-58, September 2015.

* Questions and Answers to Help Your Organization Understand ACA Reporting Requirements, Health Care Tax Tip 2015-56, September 2015.

HR professionals who wish to have these tax tips sent to their e-mail can use this link to subscribe.

The Nitty Gritty: Transcripts from ACA Webinars

The IRS webinar links posted on the agency’s ALE Info Center are especially useful for those who wish to have even more detail. They provide more than a recording and the slide deck for each webinar. From these links, downloads are also available for a webinar transcript:

* Employer-Sponsored Health Coverage Information Reporting Requirements for ALEs.

* Information Reporting Requirements for Providers of Minimum Essential Coverage.

* Employer Shared Responsibility Provision.

With this documentation available, answers to often-asked questions such as “What are the ACA reporting requirements for commonly controlled and affiliated groups?” can be found by using keywords to search the transcript.

Publishing Help: 3 IRS Drop-In Articles to Introduce the ALE Info Center

To extend its ACA awareness message beyond its own website, the IRS ACA communications team has posted three articles that employers can use. Each of the following links comes with this permission:

“The following article can be posted on your websites and used in other communication vehicles to help employers get the facts about the new IRS web page for applicable large employers.”

The articles are:

* New IRS Resource Helps Employers Understand the Health Care Law.

* New IRS Web Page Helps Employers Meet Reporting Requirement.

* Health Care Reporting Forms for 2015 Now Available.

Accounting Update

If you are considering a loan for your business and asking your accountant if you are fundable, use the list below to start your business loan search:

1. Startup Loans for Small Business

Small business startup loans are for brand new, or very young businesses, that have little to no financial history but would like to pursue a traditional debt financing option.

  • Personal credit score needs to be 700+.
  • If they’ve had a personal bankruptcy, they need to be 3+ years out.
  • They cannot have a loan out with another lender.

2. Shorter-Term Loans

Shorter-term loans are loans with terms that are very, very short, usually 3 to 18 months in length. Most often, these loans are paid back with daily payments, but sometimes they can have weekly payments.

  • Time in business needs to be 6+ months.
  • Annual revenue needs to be $65,000+.
  • Personal credit score needs to be 500+.
  • If they’ve had a bankruptcy, they need to be 1+ years out.
  • If they currently have a loan out with another lender, some short-term lenders will work with them, while others will not.

3. Traditional Term Loans
Traditional term loans that can be found online tend to be 2-5 years in length, and have monthly payments. They often require far less paperwork than a term loan from a bank.

  • Time in business needs to be 1+ years.
  • Annual revenue needs to be $150,000+. There is, however, one lender that will consider $25,000+.
  • Personal credit score needs to be 600+.
  • If they’ve had a bankruptcy, they need to be 2+ years out.
  • If they currently have a loan out with another lender, some medium-term lenders will work with them, while others will not. Keep in mind that these products are great for refinancing short-term debt. If your client has short-term debt they’d like to try to term out, they should definitely look into medium-term loans.

4. Invoice Factoring/Financing
Accounts receivable factoring is great for businesses that often have a lot of outstanding invoices. With factoring or financing, they can use their unpaid invoices as collateral for a cash advance. In most cases, they pay back the lender when their customer pays them.

  • Time in business needs to be 6+ months.
  • Annual needs to be $50,000+.
  • Personal credit score needs to be 500+.
  • Must have outstanding invoices and do business with other businesses.
  • If they have a loan out with another lender, it will not be an issue.

5. Small Business Administration Loans
SBA loans are essentially long-term bank loans. But, the Small Business Administration actually guarantees a portion of the loan, which allows banks to work with borrowers who are deemed a bit “riskier.” This is, by far, one of the most affordable financing options available to small businesses.

  • Time in business needs to be 2+ years.
  • Annual revenue needs to be $50,000+.
  • Personal credit score needs to be 640+.
  • If they’ve had a bankruptcy, they need to be 3+ years out.
  • They cannot have a loan out with another lender if they’d like to get an SBA loan.

Whether you are helping your client through the loan search or simply giving them advice at the start, make sure they understand that they should ask any lender what their minimum requirements are before starting an application. This will keep them from getting their credit pulled from lenders that aren’t a good fit for them. But, going lender by lender to do this is never fun, so you can refer your clients to the cheat sheet above for guidance.


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