Harvesting Tax Gains – Guest Blogger Todd Roberts, CPA

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Todd Roberts is a regular reader of SenneySays.  Todd forwarded the following article he wrote on “Harvesting Tax Gains.”   This article is well-written and quite timely.  Check it out below.

HARVESTING TAX GAINS (abridged and reprinted with permission)

Most tax planners are familiar with the capital loss harvesting strategy.  Under this strategy, a taxpayer sells a security at a loss, recognizes the decline in value and receives a tax deduction in the form of a capital loss.  To restrict taxpayers from simply claiming tax losses any time they want with no real change in their economic position, Congress enacted the “wash sale” rules.  Under these rules, a taxpayer will be denied a deduction if the taxpayer sells a security at a loss and buys the same security within 30 days before or after the sale.

While these “wash sale” restrictions prevent a taxpayer from selling a security at a loss and buying it back immediately, there is no such restriction on recognizing a gain for tax purposes.  Thus a taxpayer can sell a security, recognize the gain, and buy the security back immediately.  The result of such a gain harvesting transaction is that gain is reported at current tax rates and the cost basis is increased to the new buyback price, which results in smaller future gain or bigger future loss.

With the expected expiration of the “Bush tax cuts”, taxpayers in higher income brackets face an increase in capital gains taxes from 15% to 20%, along with the 3.8% tax on investment income courtesy of the healthcare legislation commonly called “Obamacare”.  These taxpayers would therefore be wise to investigate this opportunity in 2012.

This strategy can also be effective for taxpayers with low taxable income.  For taxpayers whose taxable income without regards to capital gains fall within the bottom two tax brackets (up to $70,700 of federal taxable income after deductions for married couples, or $35,350 for singles) the long-term capital gains tax rate is ZERO percent (0%)!   This means a taxpayer can sell a security with a cost basis of $50,000 for $70,000, report a $20,000 capital gain, pay no federal tax, then buy back the same security which will then have a tax basis of $70,000.  The taxpayer gets the equivalent of a free step-up in basis.

Adult children who are out of college but not earning much may be able to take the advantage of this break.  High income parents or grandparents can give appreciated stock to their children and the children can sell at the zero percent rate instead of the parents’ or grandparents’ 15% rate.  You must be cautious not to trigger the “kiddie tax” in these instances and the gift needs to be legitimate.  Taxpayers in the lower brackets must also be aware that while the tax rate on capital gains may be 0%, the gains are still counted in income, which may impact the deductibility of itemized deductions, the taxability of Social Security benefits, or generate a state income tax.

As 2012 winds down, and we all stand waiting to leap off the fiscal cliff, you should be reviewing every potential avenue to reduce future years tax liabilities. Harvesting capital gains is an excellent opportunity to do just that.  If you have any questions about gain harvesting or other tax matters, you should consult your professional tax advisor.

Thanks again to Todd Roberts CPA for writing this article as Guest Blogger.   If you have written an informative article or would like to see a topic addressed in SenneySays, please give me a call or email at  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING. The BWC  offers grants under several programs including the Drug Free Safety Program (“DFSP”) and the Workplace Wellness Grant Program (“WWGP”).   If you have any questions about these programs, Sarah Carter can provide more information.  Feel free to call or email Sarah Carter at Scarter@pselaw.com or 937-223-1130.

Are Owners Personally Liable for Corporation or LLC Obligations?

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Under state law, the owners of a corporation or an LLC are generally not liable for the debts and obligations of the entity.  But there are exceptions.  Actually quite a few exceptions.  For example, you can never avoid liability for your own actions.  So if you are driving a car on company business and you run someone over, you are personally liable for the damages.  And it is no defense to say “I was on company business.”  An owner is of course personally liable if he or she signs a personal guarantee for a debt of the corporation or LLC.  But  an owner can be liable as a "responsible party" for state sales taxes, federal and state employee income tax and payroll tax withholding, and other “trust fund” type taxes under state and federal law simply by being an officer or manager. A more complete list of situations where the owner of a corporation or LLC can be personally liable will be included in a future blog.

It is still important to run your business in the form of a corporation or LLC.  But it is also important to adequately insure your business against risk.  And even more important to be aware of, and avoid if possible, situations that put your business and personal assets at risk.

Here’s hoping you find this material helpful.  If you like what you read, pass the information and the website to a friend.  If something you read here raises a question, don’t hesitate to call.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING:  Want to save self-employment/payroll taxes on payments to owners?   Owners of partnerships and most LLCs pay self-employment tax on every dollar.  “S” corporation shareholder-officers don’t.  Give me a call if you want to know why.  Jsenney@pselaw.com or 937-223-1130.

Deferring or Accelerating Income or Deductions Could be Beneficial

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As we approach year-end, it is worthwhile considering whether you might benefit by deferring or accelerating income or deductions.

Possible Estimated Tax Payment Reduction.  Many corporations can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the preceding year.  In the alternative, they must pay estimated taxes based on 100% of the current year’s tax.  However, the 100%-of-last-year’s-tax safe harbor isn’t available unless the corporation filed a return for the preceding year that showed some liability for tax.  A return showing a zero tax liability doesn’t satisfy this requirement.

A corporation that anticipates a small net operating loss for 2012 and significant income in 2013 may find it beneficial to accelerate some of its 2013 income or defer some of its 2012 deductions (or some combination thereof) to create some net income in 2012. This would permit the corporation to base its 2013 estimated tax installments on the relatively small income amount shown on its 2012 return, rather than having to pay estimated taxes based on 100% of a larger 2013 income amount. Moreover, since tax rates may increase in 2013, accelerating income from 2013 to 2012 may result in the income being taxed at a lower rate in 2012.   But, if a 2012 NOL would permit a carryback and refund from an earlier year, the value of the carryback refund must be compared to the value of paying a smaller estimated tax for 2013.

 The 100%-of-last-year’s-tax safe harbor is not available to “large” corporations.  A taxpayer will be treated as a “large” corporation for estimated tax purposes if it had taxable income of $1 million or more in any one of the three preceding tax years. As a result, a corporation that didn’t reach that threshold in 2010 or 2011, but expects net income of $1 million or more in 2012 and later tax years, may have an extra incentive for deferring income into (or accelerating deductions out of) 2013.  Doing such a shift of income or deduction permits the corporation to avoid reaching the $1 million threshold in 2012, and enables it to use the 100%-of-last-year’s-tax safe harbor in 2013.

Deduction in 2012 of Bonus Paid in 2013.   An accrual basis corporation can deduct in the 2012 tax year a bonus not actually paid until 2013 if (1) the employee does not own more than 50% of the value of the corporation’s stock, (2) the bonus is accrued on the corporation’s books before the end of the 2012 tax year, and (3) the bonus is paid within the first 2 and 1/2 months of the 2013 tax year.   The bonus will not be taxable to the employee until paid in the 2013 year.  The 2012 deduction is not permitted, however, if the bonus is paid by a personal service corporation to an employee-owner, or by an S corporation to any employee-shareholder, or by a C corporation to a direct or indirect majority owner.

Deferral of Certain Advance Payments.  Accrual-basis taxpayers may defer advance payments for goods until the tax year in which they are accruable for tax purposes if the income inclusion for tax purposes is not later than it is under the taxpayer’s accounting method for financial reporting purposes.  An advance payment may also eligible for deferral, but only until the year following its receipt, if: (1) including the payment in income for the year of receipt is a permissible method of accounting for tax purposes; (2) the taxpayer recognizes all or part of it in the taxpayer’s financial statement for a later year; and (3) the payment is for services, goods, the use of intellectual property, the use or occupancy of property related to the provision of services, or some combination of such items.

Please call or email me at 937-223-1130 or Jsenney@pselaw.com if you would have questions or comments about the benefits of deferring or accelerating income or deductions.

AND ONE MORE THING.  Ohio recently amended its corporate dissolution statute.  If a dissolving corporation owes you money, you can be impacted if you do not act timely.

A dissolving corporation is required to give notice of dissolution to each person who has a claim against the dissolving corporation.  In order to preserve your claim, you must file a claim within 60 days following the notice date.  If you do not file your claim by the deadline, then your claim is barred.  For more information see Paul Zimmer’s article on this matter at www.pselaw.com or call Paul at 937-223-1130 or pzimmer@pselaw.com.

IRS Warns About Disaster-Related Scam Artists

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The IRS has issued a taxpayer alert (http://www.irs.gov/uac/Beware-of-Hurricane-Sandy-Scams) to warn taxpayers about possible scams in the wake of Hurricane Sandy.  The IRS is aware that scam artists have been impersonating charities to get money or personal information from well-meaning taxpayers.  These fraudulent schemes can involve contact by telephone, social media, e-mail or in-person solicitations.

In the alert, the IRS warns hurricane victims and those wishing to make charitable donations to avoid these scam artists by:

(1)   Only donating to recognized charities such as Red Cross, United Way or Salvation Army.  But beware of charities with names that are similar to familiar or nationally known organizations.  Scam artists often mimic the names and websites of legitimate charities.  Scam artists also use e-mail solicitation that directs the email recipient to a bogus website that appears to be affiliated with a legitimate charity.

(2)   Check out the name of the soliciting charity on the IRS website using the “Exempt Organizations Check” feature.  This feature permits you to find legitimate, qualified charities to which tax-deductible donations may be made.   Legitimate charities can also be found on the Federal Emergency Management Agency (FEMA) website.

(3)   Don’t give out personal financial information to anyone who contacts you soliciting a contribution.  Scam artists often attempt to collect personal information like Social Security numbers, credit card numbers, bank account numbers and passwords which they can use to steal your identity.

(4)   Also be careful if are a victim of a natural disaster.  Scam artists running bogus charities also target victims to solicit money or financial information. These scam artists have been known to contact disaster victims and claim to be working with the IRS to help victims file loss claims and get tax refunds.  These scam artists also attempt to get personal financial information that can be used to steal the victim’s identity or money.

(5)    Don’t give or send cash to anyone.  For security and tax record purposes, contribute by check or credit card or another method that provides documentation of your gift.

(6)   Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a hurricane victim with specific questions about tax relief or disaster related tax.

(7)   Taxpayers who suspect disaster-related scams should go to the IRS website and search for the keywords “Report Phishing.”  More information about tax scams and schemes can be found at the IRS website by using the keywords “scams and schemes.”

If you would like more information about this disaster-related scams, check out the IRS website or give me a call or email at 937-223-1130 or Jsenney@pselaw.com

AND ONE MORE THING.   The State of Ohio Tax Department is continuing its USE tax enforcement efforts against businesses.  In conjunction with this enforcement effort, the Ohio Tax Department has offered an amnesty program which runs until the end of April, 2013.  Businesses that enter the program will have to pay use tax back to January 1, 2009, but will not have to pay interest or penalty. If you want to know more about use tax or the amnesty program, please give me a call. Jsenney@pselaw.com or 937-223-1130.

Taxes and the Economy - CRS Report Withdrawn

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The Congressional Research Service (CRS) is a legislative branch agency within the Library of Congress. CRS is known for providing authoritative, objective and nonpartisan analysis.  The CRS published and then withdrew a report titled “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945.”  This report analyzed the correlation between tax rates and economic growth. The report questioned whether lower tax rates promoted economic growth.  The fact that the report has been withdrawn is attracting more attention than its conclusions would have drawn on their own.

The report was made available to the public at http://www.dpcc.senate.gov/files/documents/CRSTaxesandtheEconomy%20Top%20Rates.pdf.  The report traced top tax rates and GDP growth over the past 65 years.  The report noted that the top marginal tax rate has generally declined since 1945. The report stated that “the reduction in the top tax rates [has] had little association with saving, investment, or productivity growth.” The report further concluded that it would be “reasonable to assume that a tax rate change limited to a small group of taxpayers at the top of the income distribution would have a negligible effect on economic growth.”

Republicans objected to the tone of the report which included phrases such as “tax cuts for the rich.”  Republicans also objected to the methodology used in the report.  Republicans and others argued that the economy is far more complicated than is reflected by the simplistic approach taken in the report, and that the report's author failed to take into account various factors and policies such as the Federal Reserve's actions on interest rates.  In response to the growing criticism, the CRS withdrew the report.

Democrats on the other hand were very concerned about the report’s withdrawal and wrote a letter to the CRS director indicating that they believed it was “completely inappropriate for CRS to censor one of its analysts simply because participants in the political process found his or her conclusion in conflict with their partisan position.”

Hard to say if the report or its withdrawal influenced a significant number of voters.  But the timing of its release and withdrawal were somewhat odd.   In any event, regardless of who wins the election, our elected officials need to put sustained economic growth as priority number one.


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, please contact me at Jsenney@pselaw.com or 937-223-1130.