New 3.8% Medicare Tax Starting in 2013

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Starting in 2013, the Health Care and Education Reconciliation Act of 2010 will subject some taxpayers to a 3.8% tax on unearned income. This new Medicare tax will apply to single taxpayers with modified adjusted gross income (MAGI) over $200,000 and married taxpayers who file jointly with a MAGI over $250,000.  Married taxpayers who file separately will be subject to the tax if they have MAGI over $125,000. This new tax clearly targets wealthier taxpayers and  was added by Congress as a way to raise revenue to pay for the health care reform package.

For most taxpayers, MAGI will be equal to their adjusted gross income.   The new tax will be equal to 3.8% of the lesser of net investment income or the amount by which MAGI exceeds the threshold amount ($200,000 in the case of a single taxpayer).

Net investment income includes interest, dividends, annuities, royalties, rents, and income from other passive activities.  Net investment income does not include distributions from qualified retirement plans or IRAs, or tax-exempt interest.  But net gain attributable to the disposition of property, other than property held in an active trade or business, is subject to this tax.  Gains from trading in financial instruments or commodities are included, as is the taxable gain on the sale of a personal residence in excess of the personal residence exclusion amount.

Estates and trusts can be subject to this tax.  The tax will not apply to nonresident aliens or a trust in which all of the unexpired interests are devoted to charitable purposes.  The tax also does not apply to a trust that is exempt from tax under section 501 or a charitable remainder trust.

This tax on net investment income is not deductible when computing other federal taxes.   Taxpayers are required to make estimated tax payments with regard to this tax.

Now may be a good time for taxpayers to analyze their investment portfolios and start cashing in on any year-end gains, thereby limiting the amount of MAGI subject to the 3.8% tax in 2013.   Since the “wash sale rules” do not apply to gains, selling an appreciated security at year-end and then repurchasing it after year-end may make sense.

Any mechanism that reduces MAGI in 2013 and after is worth looking at.  Taxpayers may want to avoid buying securities that generate dividends, and instead consider investments that will create long term capital gain.  Taxpayers may also want to consider investments in tax-exempt securities.  Taxpayers should consider after-tax IRA investments versus annuities because income from an IRA is not subject to this tax.   And maximizing the amount of investments in any qualified plan or IRA should be considered as an alternative to other investments, since distributions from a qualified plan or IRA will not be subject to the tax.

Taxpayers should also buying life insurance products. The cash surrender value which builds up inside a life insurance policy  is not subject to the new tax, or are the proceeds payable on death.

In the case of a trade or business, the tax only applies if the trade or business is a passive activity.   Under current regulations, investors in a trade or business can avoid the new Medicare tax on their pass-through income if they are active (not passive) investors.  While the pass-through income of a sole proprietorship or partnership is always subject to self-employment tax, pass-through income of an S corporation is not.  So taxpayers should consider operating their active businesses in the form of an S corporation.  This way, the taxpayers avoid the new Medicare tax because they are operating an active business, yet they also avoid self-employment tax (that would apply if the business were taxed as a sole proprietorship or partnership).
If you have any questions concerning the new Medicare 3.8% tax, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING. Minority interests in a closely-held company are worth less that controlling interests in the same company because minority interests lack the ability to control company decisions. Interests in a closely-held company are also worth less than comparable interests in a publicly-traded company because there is no stock exchange or other ready market for sale of closely-held stock.  It is important for the owners of a business to consider and agree on how interests in the company are to be valued now and in the future for estate planning, succession planning and other reasons.   Call if you have any questions about how to value interests in your company.  Jsenney@pselaw.com or 937-223-1130.

How Do I Protect My Business Name?

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If you use a name for your business other than your personal name, you want to register the name in the state or states where you do business so that other businesses can't use your name. Going through the  registration process also keeps you from using a business name that someone else already uses.  In Ohio and some states, registration of a trade name is done with the Secretary of State’s office.  In other states, the registration is done at the county level.

A corporation does not have to separately register its name in the state where the corporation is incorporated.  The same is true for an LLC.  But a corporation or an LLC should register its trade name in other states where it does business.  Sole proprietorships and partnerships are not incorporated anywhere, so generally the owners of a sole proprietorship or a partnership will want to register their business name everywhere they do business.

Before you select a name for your product or business, you should conduct a name search.  You should do an internet search on Google and Yahoo, and a search with the state registries where you intend to do business now or in the future.  You should also do a search of the federal register of trade and service marks at www.uspto.gov.  There is a cost involved in doing these state and federal registrations.  But it can be far more costly in terms of time, money and lost opportunity if you have to change the name of your business or product because you used someone else's name.

If you are using a trademark, be sure to state on your packaging and advertising materials that you own the mark.  If you have federally registered the mark, use an “R” with a circle around it to indicate this.  If you have registered the mark with the state or not at all, use the letters “TM” for trademark or “SM” for service mark to indicate your ownership of the mark.  And make sure you enforce your rights by notifying other businesses in writing if they improperly use or infringe on your mark.

A state trademark registration can be done in a few weeks and creates a presumption of use throughout the state.  The state registration may also entitle you to attorney fees upon infringement.  A federal registration can take 18 months or more, but results in a presumption of use throughout the US.  A Federal registration can give the owner the right to collect statutory damages and attorney fees.

Your business name can be the most valuable asset you business owns.  Protect it.  If you are interested in finding out how to register or otherwise protect your tradename or trademark, give me a call.

AND ONE MORE THING.   We all face the prospect of a darker tax climate in 2013 for investment income and gains. Under current law, higher-income taxpayers face a 3.8% surtax on their investment income and gains under changes made by the Affordable  Care Act.  In addition, if the "Bush tax cuts" are allowed to lapse, all taxpayers will face higher taxes on investment income and gains, and the vast majority of taxpayers also will face higher rates on their ordinary income. If you have any questions about how the Affordable Care Act or your personal tax planning give me a call.   Jsenney@pselaw.com or 937-223-1130.

Captive Insurance Companies

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Tired of paying so much federal and state income tax?  Looking for tax deductions?  Tired of spending so much money on property casualty insurance?  Wish you could save more money for future expansion or to create a rainy-day fund?  For some businesses, setting up a captive insurance company may be the answer.
Setting up a captive insurance company which complies with IRC section 831(b) has several advantages.  The premiums paid to the captive are deductible by the operating company, but are not treated as income by the captive.  The captive pays tax only on the investment income it generates.  The operating company would still likely maintain some reinsurance to cover catastrophic loss, but the cost of insurance paid to third parties is reduced.   And setting up a captive creates a pool of assets that are protected from the operating company's creditors.

Generally speaking, the annual operating cost for a captive ranges from $50,000 to $75,000 which includes underwriting, policy writing, financial reports, bookkeeping, audit fees, actuary review and risk pool fees (if the captive is not a stand-alone).    The amount of the annual premium that is paid to the captive is generally in the $500,000 to $1,000,000 range.   The maximum annual premium permitted is $1,200,000.
If you are interested in finding out more about captive insurance companies, please give me a call or email.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING. In an effort to create jobs in  Ohio, the legislature enacted a new "InvestOhio" Tax Credit to reward investments in an eligible small business.   Under the new law, a non-refundable 10% tax credit is available for any qualifying “cash for equity” investment in a small business up to $1 million per eligible investor ($2 million for spouses filing jointly).  An eligible investor is an individual, estate or trust subject to  Ohio personal income tax.   The Director of Development is authorized to award up to $100 million in tax credits during the current State of Ohio fiscal biennium, which ends on June 30, 2013.  If you have any questions about how to apply for the InvestOhio tax credit give me a call.Jsenney@pselaw.com or 937-223-1130.

Squeeze-Out Merger - LLC

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A squeeze-out merger is a device used to eliminate unwanted minority owners.  Under the Ohio statute (and the statute of many states), mergers of limited liability companies must by all of the managers or all of the members unless the Operating Agreement provides for a different number or percentage.   Many LLC Operating Agreements contain language that permits a majority or super-majority of the managers or members to make decisions affecting the LLC.  If this is the case, one or more managers or members holding the required majority or super-majority can eliminate minority owners.

The squeeze-out works as follows: (1) the controlling owners create a new LLC owned only by them; (2) the old LLC is merged with and into the new LLC; (3) the merger agreement provides that the controlling owners are the only owners of the surviving LLC; and (4) the minority owner is paid fair cash value for his or her LLC ownership units.

If the squeeze-out merger is properly done, the minority owners only recourse is to argue that the compensation they received in exchange for their ownership interests was not fair cash value.   The minority owners are unable to prevent the merger.

A squeeze-out merger can be a powerful tool for controlling owners to remove disruptive minority owners.  But a squeeze-out merger can also be a heavy-handed way for greedy control owners to eliminate minority owners when the LLC is starting to generate cash and build value.

To protect yourself, you need to read and understand what the Operating Agreement says.  If you want to talk about squeeze-out mergers or would like some help reviewing or drafting appropriate Operating Agreement language give me   a call.  Jsenney@pselaw.com or937-223-1130.

 
AND ONE MORE THING. If you or a friend have invented a new product, or have improved an existing product, you need to be careful to preserve your rights as to such invention or improvement. To protect your rights, you can seek a provisional patent or a full utility patent. But you must make an application within one year after the first public disclosure of the invention.  A public disclosure is any disclosure of information about the invention that is made without restriction on the recipient’s right to disseminate such information. To avoid making a public disclosure, it is important to have every person or entity that will receive information about such invention sign a non-disclosure agreement. Call or email me if you need a non-disclosure agreement drafted.   Jsenney@pselaw.com or 937-223-1130

Security Law Concerns When Raising Money for a Business Opportunity

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Starting or growing a business takes money.  Sometimes a lot of money.  Often more than the business owner has access to.  There are many ways to raise money for a business.  You can borrow money from friends and family.   Or you can ask friends and family to invest and become partners.   You can ask suppliers or even competitors to lend money or become a partner in your new venture.   Or you can seek out angel investors who find your project interesting.  You can borrow money or you can sell stock or LLC ownership interests.  In each of these situations, federal and state security issues arise.

As a general rule, security offerings must be registered with the Securities Exchange Commission and the various state security agencies unless otherwise exempt.  There are a number of exemptions that might apply in a particular situation.  At the federal level, the most common exemptions are the intrastate exemption (only offer to residents of a single state), sales only to accredited investors (persons of high net worth and/or income) and other Regulation D offerings.   Regulation D offerings are offerings to accredited investors and up to 35 non-accredited investors where certain disclosures concerning the business, the business owners, the securities being offered, and the risks and rewards of the securities are made to investors.

At the state level, offerings are often exempt when less than a specified number of persons in the state acquire the security.  For example, in Ohio sales to 10 or fewer persons in a rolling 12 month period are exempt.  Most states also have exemptions that parrot the Regulation D exemptions.

When doing a Regulation D offering, there can be no general solicitation.  A Form D is prepared and sent to the SEC.  The state security agencies where the investors reside are notified of the offering.  Investors are provided with an offering circular, a subscription agreement and an investor statement.  The offering circular describes the risk and rewards of the offering, and can be used to defend the issuer from claims by investors that the issuer misled them with false information.  The investor statement requires the investor to state where he or she resides and whether he or she is an accredited investor.  The subscription agreement requires the investor to specify exactly how much he or she will invest in the securities.

If you are trying to raise money to start a business or expand an existing business, we can help you avoid running afoul of the federal and state security laws.  Committing security fraud can subject the issuer to treble damages and possible civil and criminal actions.  Please call or email us with any questions or comments at 937-223-1130 or jsenney@pselaw.com.

AND ONE MORE THING.  The State of Ohio like many states is trying to raise revenue.  The state has engaged many private attorneys and collection firms to track down unpaid tax assessments.  Many of the assessments they are trying to collect are 20 to 30 years old.  The tax returns, cancelled checks and other information taxpayers would use to defend against these assessments has often been discarded.  If you receive a notice from a tax collector seeking to collect an unpaid tax assessment, give us a call or email at 937-223-1130 or jsenney@pselaw.com.