Avoiding Problems When Making S Election for LLC

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As you may know, an LLC with more than one member is treated as a partnership unless it elects to be treated as a corporation or S corporation.  When deciding whether to make an election for an LLC to be taxed as an S corporation, there are various tax issues to consider and pitfalls to avoid.

Why Elect S Status?  One of the most common reasons for electing S corporation status is to reduce the amount of social security and medicare tax that owner-employees of the LLC pay.  This reason to elect S corporation status was given a boost with the enactment of the additional 0.9% medicare tax imposed on the compensation of employees with income in excess of $250,000 (married filing jointly) or $200,000 (individual).

How to Elect S Status.  S corporation status is obtained by filing IRS Form 2553 indicating that the LLC elects to be treated as an S corporation for federal income tax purposes.  But filing the Form 2553 is not effective unless the LLC otherwise qualifies to be treated as an S corporation as of the election date.

S Corporation Requirements.  An S corporation is not permitted to have owners who are corporations or non-resident aliens.  An S corporation is not permitted to have more than 100 owners.  An S corporation may have only one type of ownership interest (cannot have both common and preferred stock).  If your LLC violates any of these requirements, the LLC cannot be treated as an S corporation for federal income tax purposes.

Governing Documents.   The main governing document for an LLC is its operating agreement.  Since  LLCs are by default treated as partnerships for federal income tax purposes, most off-the-shelf, boilerplate operating agreements are set up in the form of modified partnership agreements.  As such, the standard operating agreement contains many provisions whose only purpose is addressing federal partnership income tax issues.  Many of the partnership tax provisions are not required, or even permitted, if the LLC is intended to be treated as an S corporation for federal income tax . Many of these typical LLC operating agreement provisions are not permitted if the entity is to be taxed as an S corporation.

One Class of Stock.  S corporations may have only one class of stock (although voting differences are ignored).  Partnerships may have any number of different preferred classes of ownership interests.  S corporations are not permitted to have classes of ownership which have different rights to share in distributions of cash or assets, or in allocations of profit and loss.   Since LLC operating agreements are generally set up as modified partnership agreements, they often contain partnership tax language including , qualified income offsets, minimum gain chargebacks and other provisions that may override allocations and distributions that would otherwise be done on a pure ownership percentage basis.

State Law Defaults.  Under most state LLC laws, provisions that are not otherwise covered in the LLC operating agreement are governed by state law.  It is possible that the LLC default rules could result in the LLC failing to qualify for S corporation treatment.  For example, if there is no provision describing how cash is to be distributed or income allocated among the members, the Ohio default is that allocations and distributions by an LLC are to be made based on the relative capital contributions made by the members.  To the extent one member has contributed more or less to the LLC on a relative pro rata basis than his ownership percentage would otherwise dictate, such LLC could be found to have violated the “one class of stock” rule.

Fixing Operating Agreements.  Care needs to be taken to remove any language giving a member’s ownership interest priority over another member’s ownership interest.   References to IRC section 704 and other partnership tax provisions should be eliminated.  Any references to doing allocations or distributions in relation to capital account also need to be carefully analyzed and probably deleted.  Many LLC operating agreements provide for capital calls.  Capital call provisions are permissible for an S corporation, but the remedy for failure to meet the capital call must result in a change in the ownership percentage and not affect right to, or priority of, distributions or allocations.

Failure to Meet S Corporation Requirements.  If an LLC that has elected to be taxed as an S corporation fails to meet the S corporation requirements (and the LLC does not apply for and obtain late election or inadvertent invalid election relief) the LLC will be treated as a partnership (not a C corporation) under the entity status default classification rules.

Planning.   When setting up or converting an LLC to be taxed as an S corporation, you need to prepare and file the appropriate IRS election form.   But you must also carefully review and consider the various provisions of the LLC operating agreement and the state law LLC default provisions.  If you are setting up or converting an LLC to be taxed as an S corporation give Jeff Senney a call or email at 937-223-1130 or Jsenney@pselaw.com

AND ONE MORE THING.  The IRS has recognized that the delayed issuance and processing of income tax forms resulting from the income tax code changes contained in the 2012 Taxpayer Relief Act has impacted the ability of taxpayers to timely estimate and pay their 2012 tax liability.  The IRS has provided relief to taxpayers who request an extension of time to file a 2012 income tax return that includes one of the affected tax forms.  Taxpayers will be deemed to have demonstrated reasonable cause and lack of willful neglect, provided that the following requirements are met (1) a good faith effort is made to properly estimate the tax liability on the extension application; (2) the estimated amount is paid by the original due date of the return; and (3) any tax owed on the return is fully paid no later than the extended due date of the return.  When responding to an assessment notice, a taxpayer should submit a letter describing eligibility for this relief, identifying which of the affected form(s) below was included with the taxpayer's return as filed, and make reference to Notice 2013-24.  Call or email Jeff Senney at 937-223-1130 or Jsenney@pselaw.com if you would like to see a list of the affected forms or want help with seeking penalty abatement.

Affordable Care Act Update - How to Make Determinations Regarding Employer Mandate and Part-time Employees

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Matt Stokely of our firm has written a timely article on how to make determinations regarding the Employer Mandate and Part-time employees.  Check out Matt's article below.

AFFORDABLE CARE ACT UPDATE - HOW TO MAKE DETERMINATIONS REGARDING EMPLOYER MANDATE AND PART-TIME EMPLOYEES

One of the biggest decisions for many companies this year will be what to do about their health benefits.  Major provisions of the Affordable Care Act (“ACA”) take effect on January 1, 2014, and certain employers could see health-related costs go up as a result of the law’s requirements.  Employers will have to determine if they are subject to the Employer Mandate, and if so, to whom they will be responsible for offering health insurance or paying penalties.  Specifically, the ACA requires Applicable Large Employers – those with 50 or more full-time-equivalent employees – to ether provide “qualified” health coverage for all of their employees, or pay an annual penalty of $2,000 per full-time employee (after the first 30) if they don’t provide such coverage.  If they do provide coverage but it’s not “affordable,” the penalty is $3,000 per employee who finds it “unaffordable” (with a cap at the penalty they’d pay for not offering coverage at all).  “Full-time” is defined as 30 hours or more per week, or 120 hours or more per month.  (“Affordable” is defined as less than 9.5% of the employee’s family income).  This article describes how employers are required to make these calculations.

Applicable Large Employers Subject to Employer Mandate

An employer is subject to the Affordable Care Act Employer Mandate as an Applicable Large Employer if it employed an average of at least 50 full-time employees (including full-time equivalent employees (FTEs)) on business days during the preceding calendar year.  This involves the calculation of Full-Time Employees that work on the average of 30 or more hours per week and “FTEs”.  In determining whether an employer is an Applicable Large Employer for the current calendar year, the employer is required to calculate the number of FTEs it employed during the preceding calendar year.  All employees (including seasonal employees) who were not full-time employees for any month in the preceding calendar year are included in calculating the employer’s FTEs for that month.  The number of FTEs for each calendar month in the preceding calendar year are determined using the following steps:

1)      Calculate the aggregate number of hours of service (but not more than 120 hours of service for any employee) for all employees who were not full-time employees for that month.

2)      Divide the total hours of service in step (1) by 120.  This is the number of FTEs for the calendar month.

In determining the number of FTEs for each calendar month, fractions would be taken into account.  For example, if in a calendar month employees who are not full-time employees work 1,260 hours, there would be 10.5 FTEs for that month.  Using this calculation, if the employer employs 50 or more FTEs in the prior calendar year, it is subject to the Employer Mandate, and must offer affordable health insurance to its full-time employees or pay penalties.

Determination of Part-Time Employee Status

The IRS has issued Notice 2012-58 to modify and expand on the safe harbor guidance previously provided concerning how to make determinations about full or part-time employees status.  If an employee is a part-time employee who works an average of less than 30 hours per week, the Applicable Large Employer will not have to offer health insurance or pay penalties on those part-time employees.

Notice 2012-58 defines three time periods- measurement periods, stability periods, and administrative periods.  New employees who are not expected to work full-time (variable hour or seasonal employees) can be employed without health insurance for an “initial measurement period” of between 3 and 12 months, as determined by the employer, during which the employees hours are tracked.  If at the end of that period it becomes clear that the employee has been working an average of 30 hours a week or more, the employer must offer health insurance to the employee for a “stability period” of at least 6 months or for the length of the initial measurement period, whichever is longer.

Alternatively, if the employee worked on average less than 30 hours a week, the employer can treat the employee as a part-time employee for a subsequent stability period and not offer insurance.  The employer can take up to 90 days for an “administrative period” before the stability period begins during which the employer can determine eligibility and add the employee to its health insurance program.  In no event, however, can the combined measurement period and administrative period extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date.

Ongoing employees with variable hours can also be made subject to measurement periods and stability periods, with the measurement periods lasting 3 to 12 months and the stability periods lasting for the same period of time but in no event less than 6 months.  If an ongoing employee is determined to be part-time during any measurement period, the employer can deny coverage to that employee without risking a penalty for the next stability period.  If the employee is determined to be full-time during the measurement period, the employer must insure the employee for the following stability period or risk paying a tax penalty.

Employers needing assistance in making these determinations or who wish to consider other issues under the ACA, can call Matt Stokely at Pickrel, Schaeffer & Ebeling at 937-223-1130 or mstokely@pselaw.com

AND ONE MORE THING.  The 2012 Taxpayer Relief Act will prevent many of the tax hikes that were scheduled to go into effect this year and retain many favorable tax breaks that were scheduled to expire, but will also increase income taxes for some high-income individuals and slightly increase transfer tax rates from 2012 levels. Further, the Act extends a host of expired and expiring tax breaks for businesses and individuals, and also adds a number of new provisions to the Code.  More about this will be coming out in a future blog.  Call me at Jsenney@pselaw.com or 937-223-1130 if you have questions and can’t wait.

In Plan Roth Rollover - Does Your Plan Permit it?

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In the “Blue Book” for the recently enacted American Taxpayer Relief Act of 2012 , the Joint Committee on Taxation provided a detailed explanation of the Internal Revenue Code provision regarding how to accomplish a qualified “in-plan Roth rollover” starting January 1, 2013.   This Blue Book explanation is helpful since no formal committee report or other explanation has been provided yet.

Taxpayers generally may transfer or convert amounts in a traditional IRA to a Roth IRA if such amounts are eligible for rollover by either doing a 60-day rollover, a trustee-to-trustee transfer, or an account re-designation.  The amount so transferred or converted is includible in income as if a withdrawal had been made, except that the 10% early withdrawal tax won’t apply.

The Blue Book notes that amounts under a qualified plan are distributable only as permitted under the terms of the plan and law.  One law that applies to plans generally is a requirement that amounts contributed to a 401(k) or profit sharing plan may not be distributed in-service for at least two years.   So even if no other statutory distribution restriction applies to an amount, the plan must generally contain language that permits in-service distributions after a fixed number of years, and such fixed number of years must be no less than two.

But if a qualified plan has a qualified Roth contribution program, any amount eligible under the plan for distribution and rollover to another eligible plan may be rolled over into a designated Roth account in the plan for the individual.   If this is done, the amount rolled-over is includible in gross income (except to the extent it represents after-tax contributions), but the 10% early distribution tax won’t apply.

The 2012 Taxpayer Relief Act provides that an applicable retirement plan that includes a qualified Roth contribution program may allow an individual to elect to have the plan transfer amounts not otherwise distributable under the plan to a designated Roth account in the plan maintained for the individual's benefit.  Under the 2012 Taxpayer Relief Act, the plan will not be treated as violating the restrictions on distributions applicable to such plan solely because of the transfer.

The Blue Book explains that the new law doesn't change the basic character of the amounts being rolled-over.  So if otherwise non-distributable amounts are rolled-over into the Roth account, such amount remain non-distributable.   For example, an amount in a 401(k) or profit-sharing plan which is not distributable because the required number of years has not passed remains non-distributable for the balance of the required number of years.

Making a rollover contribution to a Roth account is not without cost.  In exchange for getting tax-free distributions out of the Roth account down the road, you are required to recognize and pay tax now on the amount rolled over.  In evaluating whether you should make a Roth rollover, you need to consider how much tax you would pay now versus how much tax you expect to save later, and also consider how long you have before retirement and how you expect your plan investments to perform.   This can be a bit of a guessing game.   The income and capital gains rates have changed recently and it is not unlikely they will change again in the future.  And while the stock market has been ticking upwards, will that continue?

Please call or contact me at 937-223-1130 or Jsenney@pselaw.com if you would like to discuss the new in-plan Roth rollover provision further.

AND ONE MORE THING.   For some time, the IRS and the courts have held that the annual gift exclusion is unavailable for certain transfers involving minority interests in closely held business entities.  The IRS has taken the position that gifts of minority interests in closely held entities do not qualify as gifts of present interests, and are therefore ineligible for the annual exclusion, where the distribution of profits in those entities is discretionary and such minority interest are subject to transfer restrictions.  A recent Tax Court case, however, has drawn a distinction where entity income was somewhat predictable and where some income was paid to owners annually.  If you would like to know more about the annual gift exclusion, business valuation discounts, or succession planning please call or contact me at 937-223-1130 or Jsenney@pselaw.com

Certain Services are Eligible for "DISC" Treatment

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When most people consider the significant tax advantages of using a domestic international sales corporation (DISC), they think first about the inventory and other physical assets they intend to sell outside the United States.  Generally forgotten is the fact that certain  service revenues are eligible to receive DISC treatment as part of the DISC export revenue.  These eligible services include: (a) related and subsidiary services; and (b) architectural and engineering services on construction projects.

Services qualify as “related and subsidiary” if the services are furnished by the DISC or a related supplier, and if the services are related or subsidiary in some way to the sale or lease of export property, and are the type of services that are customarily and usually furnished in connection with sale of the export property.  Typical examples of related and subsidiary services would be warranty, maintenance, repair or installation services.

In addition to the “related and subsidiary services” discussed above, engineering and architectural services on construction projects (whether or not the projects are built) outside the United States.   In order for the project to be considered “construction” for purposes of receiving DISC treatment, the project must include the erection, expansion or repair of a new or existing building or other structure including roads, dams, bridges, tunnels, canals, railroads, railroad tracks and pipelines.

Engineering services eligible for DISC treatment  include feasibility studies and other professional services requiring engineering education, training and experience, and the application of specialized knowledge of mathematical, physical or engineering sciences.  Examples of engineering services include consultation, investigation, evaluation, planning, design, or supervision of the construction project.

Architectural services eligible for DISC treatment include professional services such as consultation, planning, aesthetic and structural design, drawings and specifications, or oversight of compliance with plans, specifications and design.

If you export products and services and are not yet taking advantage of the tax savings afforded by use of a domestic international sales corporation, give me a call or email to discuss at Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.   If you and your spouse are forming an LLC, you have the choice of treating your LLC as a partnership, a corporation or a sole proprietorship for federal income tax purposes.  If you and your spouse each own LLC membership units, the LLC must be taxed as a partnership unless you elect to treat it as a corporation.  If only one of you own LLC membership units, you must treat the LLC as a sole proprietorship unless you elect to treat it as a corporation.  If the LLC is treated as a partnership, you must file a partnership tax return on IRS Form 1065 and include a Schedule K-1 for yourself and your spouse to report the partnership income allocated to each of your membership interests.  If the LLC is treated as a sole proprietorship, you do not need to file a partnership tax return and only need to attach a Schedule C to your IRS Form 1040 to report the income generated by the LLC.  Many spouses opt to have the LLC owned by one spouse and treated as a sole proprietorship to avoid the necessity of filing the partnership return.  Call or email me at 937-223-1130 or Jsenney@pselaw.com if you have any questions about the best way to set up your LLC for tax purposes.

Internet Sales Can Qualify as DISC Export Property

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 In previous Blogs we talked about the benefits of setting up a domestic international sales corporation (“DISC”).   By using a DISC, domestic manufacturers who export products are able to reduce their overall federal income tax rate on export income by nearly 20 percentage points (from the 39.6% top ordinary income tax rate to the 20% qualified dividend rate).   What many taxpayers do not know is that the benefits of using a DISC extend not just to sale of physical products that are shipped outside the US, but also to sale of certain services and to sale of computer programs, information and other data that are transmitted out of the US electronically.

Under the Internal Revenue Code and the Treasury Regulations, "export property" is defined to mean property:

1. that is manufactured, produced, grown or extracted in the United States by a person other than a DISC;

2. that is held primarily for sale, lease, or rental in the ordinary course of trade or business for direct use, consumption, or disposition outside the United States; and

3. where not more than 50% of the fair market value of the product is attributable to parts, components or other items imported into the United States.

The IRS has treated export sale of domestically produced computer software programs as export property for DISC purposes for many years.   Treasury Regulations were eventually issued to address some of the questions that arose in this area.  Under the Treasury Regulations, the key inquiries are whether the particular software program, data or information is  “export property” and whether the software is for use or consumption outside the United States.    As defined and described in the Treasury Regulations, many different types of electronically-transmitted computer programs, information or data can be export property, including electronically-transmitted computer software programs, films, books, tapes, records, or similar musical, artistic or literary reproductions.    However, the definition of export property does not include patents, inventions, models, decisions, formulas or processes, copyrights, goodwill, trademarks, and other like intellectual property.

In the next blog, we'll look at the types of services that can be included within the definition of export property.  If you have any questions or comments about how to set-up a DISC, or about what type of products or services are within the meaning of export property, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.    Ohio recently amended its corporate dissolution statute. If you are owed money by a corporation that is dissolving, you can be adversely impacted if you do not act in a timely manner.  The dissolving corporation is now required to give notice of dissolution to each known creditor and to each person that has a claim against the dissolving corporation. The notice will advise that you must file a claim for what you are owed and a deadline for filing the claim must be fixed. The deadline must be at least 60 days following the date the notice is given. The claim must be in writing and must “identify the claimant and contain sufficient information to reasonably inform the corporation of the substance of the claim.”  IF YOU DO NOT FILE A CLAIM BY THE DEADLINE THEN ANY CLAIM YOU HAVE AGAINST THE DISSOLVING CORPORATION IS BARRED.  This is not something you can set aside until later. Failure to file a timely claim is fatal.  if you have a claim against a corporation and receive a Notice of Dissolution, you need counsel to advice on the technicalities of the new statute or your claim may be barred.  Please contact one of our Business Attorneys at 937-223-1130 for guidance on these matters.

Built-In Gain Tax "Recognition Period" only 5 years Thru 2013

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If you have an “S” corporation that used to be a “C” corporation and you are thinking of selling all or part of your business assets, 2013 would be a real good time to close the deal.

A sale of assets by an “S” corporation that used to be a “C” corporation during the “recognition period” is subject to a built-in-gains tax.  A built-in-gain tax is imposed on the corporation, at the highest corporate tax rate, on the appreciation in asset value that existed on the date the corporation became an “S” corporation.  The shareholders may then be subject to a second tax on distribution of the sales proceeds.
This “double tax” created by imposition of the built-in gain rules can be eliminated if the corporation holds and sells assets only AFTER the recognition period has expired.   But the longer the recognition period is, the tougher that is to do.

The recognition period used to be 10 years.  This can be an awfully long time to hold assets.  Several years ago Congress recognized this and reduced the recognition period temporarily to 5 years.  The recognition period was set to return to a 10 year period after 2012.   But the recently enacted 2012 Tax Relief Act extended the 5 year recognition period to cover all sales that take place through the end of 2013.   That means you can sell assets in 2013 that you have held at least 5 years without triggering built-in gains tax.
If you have any questions about built-in-gains tax please call or email me at 937-223-1130 or Jsenney@pselaw.com

AND ONE MORE THING... 
Don’t forget, the new special additional 3.8% Medicare Tax imposed on net investment income is subject to the Estimated Income Tax Provisions.  This 3.8% Medicare tax is one of the taxes that is included in computing the penalty for underpayment of estimated tax under Code section 6654(f).   Taxpayers who expect to be subject to this 3.8% Medicare tax need to take this tax into account when calculating estimated tax payments.  If you have questions concerning the 3.8% medicare tax and whether you are subject to such tax, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

Fiscal Cliff Averted - Compromise Act Hurts Some - But Not that Much - Yet

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The New Year's Eve "fiscal cliff" deadline came and went.  To avoid mandatory across-the-board budget cut scenario, the U.S. Senate and House of Representatives on January 1st adopted a compromise measure.  With some modifications targeting only “wealthy” taxpayers, the compromise act permanently extended certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The compromise act (ACT) permanently fixed the alternative minimum tax (AMT) problem and temporarily extended numerous other tax provisions that lapsed at midnight on December 31st or had already expired.

Noteworthy among the tax items not addressed by the Act was extension of the payroll tax “holiday” taxpayers had enjoyed in 2012.  The temporary lower 4.2% rate which had applied to the employees’ portion of the Social Security payroll tax was not extended and reverted to 6.2%.

Summary of the Compromise Act
The Act included the following provisions:

• For most taxpayers, income tax rates remain unchanged at the 2001/2003 levels.
• Individuals earning more than $400,000 and couples earning more than $450,000 are subject to a higher 39.6% top marginal rate.
• These same upper-income taxpayers face an increase in capital gains and qualified dividend tax rates from 15% to 20%.
• Individuals earning more than $250,000 and couples earning more than $300,000 are subject to a phase-out on personal exemptions and itemized deductions.
• The tax rate on large estates (estates valued over $5 million for individuals and $10 million for couples, indexed for inflation) rises from 35% to 40%, the estate and gift tax regimes remain unified, and spouses continue to have access to unused estate tax exemption amounts (so called portability).
• The alternative minimum tax (AMT) is permanently adjusted for inflation, preventing more families from being subject to AMT.
• 401(k) and other defined contribution retirement plans are permitted to provide plan participants with  expanded opportunity to convert pre-tax savings in such plans into Roth savings.
• The IRA charitable rollover provisions are extended for 2012 and 2013 (with ability to use the provision for 2012 distributions).
• Unemployment benefits are extended for one year.

However, many other issues, such as budget and entitlement cuts were not addressed however in the Act.  If you have questions or comments concerning the fiscal cliff compromise Act, call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.  Starting January 1, 2013, each person will pay a special Medicare tax ( in addition to his/her regular income tax) equal to 3.8% of the amount that certain items of net investment income cause the taxpayer(s) adjusted gross income to exceed $250,000 (for joint filers) or $200,000 (for non-married filers).  In addition, starting January 1, 2013, each person will pay an additional 0.9% Medicare tax on wages and self-employment income in excess of various threshold amounts. The threshold amount for married individuals filing jointly is $250,000 ($125,000 if they file separate returns), and $200,000 for single individuals.  Call or email me to discuss any questions you have concerning these extra taxes at 937-223-1130 or Jsenney@pselaw.com.

Guest Blogger Sarah Carter – Ohio BWC Workplace Wellness Program Grant

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The Ohio Bureau of Workers’ Compensation (“BWC”) provides a grant to help employers develop a workplace wellness program with the goals of: (1) reducing the cost of workers' compensation claims; and (2) lowering health care costs for businesses by improving the health and wellness of the workforce.



To be eligible for this grant you must: (1) be a state-fund employer; (2) be current on funds owed to the BWC; (3) maintain active coverage; and (4) not already have a wellness program. The program consists of two components: (1) a health risk appraisal (“HRA”) with a biometric assessment that measures health risk factors; and (2) solutions designed to address the risk factors. If you have only one of these tools in place, then you do not have a full wellness program and are eligible to apply for the grant.



If you are approved for a grant, you will be required to contract with a third party wellness program vendor, comply with fund usage guidelines, and complete other conditions established by the BWC, such as data sharing. Your business may receive $300 per participating employee over a four-year period, up to a maximum amount of $15,000 per policy. The BWC defines a “participating employee” as someone who completes an HRA and biometric assessment in the first three months of the program and each of the following years of the program. Employees must also participate in at least one activity to enhance or maintain their health in each program year.



If you have any questions about these BWC grant programs, Sarah Carter can be reached at (937) 223-1130 or scarter@pselaw.com.



AND ONE MORE THING.  The IRS has issued a reminder to taxpayers that, as a result of changes made by the American Taxpayer Relief Act of 2012, IRA owners who are age 70-1/2 and older have until Jan. 31, 2013, to make tax-free transfers to eligible charities and treat these transfers as if they were made on Dec. 31, 2012.  Additionally, eligible IRA owners who received a distribution in December of 2012 can transfer any portion of that distribution to a charitable organization by Jan. 31, 2013, and treat it as made in 2012.  Call or email Jeff Senney at 937-223-1130 or Jsenney@pselaw.com.

Estate and Gift Tax Changes Enacted

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On January 1, 2013, Congress passed the Taxpayer Relief Act of 2012.  The President quickly signed it into law.   Among other things, the 2012 Act made permanent some of the estate, gift and generation-skipping transfer tax provisions which had been set to expire after 2012.   If you have not talked to your estate and gift planning attorney lately, now would be a good time to touch base and discuss how these recent changes affect your estate and succession plans.

Background on Transfer Tax Changes.  Before enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) there was no gift tax and no estate tax on the first $675,000 of transfers during life or at death for gifts made and individuals dying in 2001. These two taxes were tied together under a unified system having a top rate of 55%.  EGTRRA increased the exemption amount in stages after 2001. For individuals dying in 2006 through 2008, the exemption was $2 million. The exemption rose to $3.5 million for individuals dying in 2009. But under EGTRRA, the gift and estate exemptions were no longer unified, and the gift exemption remained at $1 million for all years after 2001.  Under EGTRRA, the top estate and gift tax rate was reduced in stages. The top rate was 45% for transfers in 2007 through 2009. In 2010, there was to be no estate tax and the top gift tax rate was to be 35%.

All of the EGTRRA changes were set to expire at the end of 2010. If allowed to expire, the rates and rules were to revert to those that applied pre-EGTRRA. However, the 2010 Tax Relief Act provided temporary relief from the EGTRRA expiration. Among other changes, the 2010 Act reduced the maximum tax rates for 2011 and 2012, and continued other estate and gift tax relief provisions that would otherwise have expired after 2010.  But absent enactment of the 2012 Act, the relief granted by EGTRRA and the 2010 Act would have expired, and the rates and rules in place pre-EGTRRA would have again applied.

Permanent Exemption Amount.  The 2012 Taxpayer Relief Act permanently establishes the estate exemption amount at $5 million per person.  The exemption amount is indexed to increase by an inflation factor.  For 2012, the exemption amount as indexed increases to $5,120,000. The exemption is allowed in the form of a unified credit against tax.

Tax Rates Increased.  The top estate and gift tax rate for gifts made and decedents dying in 2012 was 35%. The 2012 Taxpayer Relief Act changes the maximum rate to 40% for gifts made and decedents dying after 2012. Under the Act, transfers over $500,000 are taxed at 37%, transfers over $750,000 are taxed at 39% and transfers over $1,000,000 are taxed at 40%.

Gift Tax Changes.  Under the 2010 Act, the exemption was $1 million and the gift tax rate was 35% for gifts made in 2010. For gifts made after 2010, the gift tax was unified with the estate tax, with an exemption amount of $5 million (indexed after 2011) and a top rate of 35%. The 2010 Act also made changes to how gift taxes are taken into account in computing estate and gift taxes. All of the temporary changes made under the 2010 Act have now been made permanent by the 2012 Taxpayer Relief Act, except that the 2012 Act changed the maximum gift tax rate to 40%.

Generation-Skipping Tax Changes.  Under the 2012 Taxpayer Relief Act, for decedents dying and gifts made after 2012: the GST tax exemption is equal to the basic exclusion amount of $5 million ( indexed); the GST tax rate is 40%; and the technical modifications to the GST rules made by EGTRRA continue to apply.

Portability of Unused Exemption between Spouses.  The 2010 Act authorized estates of decedents dying after 2010 and before 2013 to elect to transfer any unused exclusion to the surviving spouse. The amount received by the surviving spouse is called the deceased spousal unused exclusion (DSUE) amount. If the executor of the decedent's estate elects transfer of the DSUE amount, the surviving spouse can apply the DSUE amount received from the estate of his or her deceased spouse against tax liability arising from subsequent gifts and death transfers. The 2012 Taxpayer Relief Act made this portability provision permanent.

If you have any questions or comments about the 2012 Act estate and gift tax changes, please give our estate planning attorneys, John Clough, Jim Jacobson or Joe Mattera, a call at 937-223-1130, or shoot me an email at  Jsenney@pselaw.com.

AND ONE MORE THING. The 2012 Taxpayer Relief Act also retains many favorable income tax breaks for businesses and individuals, and also adds a number of new provisions to the tax code.  More about this will be coming out in a future blog. Call me at Jsenney@pselaw.com or 937-223-1130 if you have questions and can’t wait.

Ohio Incumbent Workforce Training Voucher Program

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Ohio has recently announced details of the Ohio Incumbent Workforce Training Voucher Program.  This program provides reimbursement of 50% of qualified employee training costs up to $4,000 per employee.  This program is designed to provide financial assistance to help Ohio employers train their employees and improve their economic competitiveness.

The program is limited to $20 Million in reimbursements.  Registration for participation in the Program opened on January 7th and is on a first come, first served basis.  So it is important not to delay.  You need to get your Application submitted as soon as possible.

Program Requirements:

In order for training costs to be eligible for reimbursement under the Program, the following requirements must be met:

1.  Eligible Training Costs.  Training will only be considered for the Program if the Application is submitted at least 30 days prior to the start date of the training.  Training must start after you file your Application and must be completed by June 30, 2013.  The training costs must relate to the employee’s current position or future advancement with the employer, but may be:

(a)    Classes, either non-credit or credit, at an accredited education institution;

(b)   Training that leads to an industry recognized certificate;

(c)    Training provided in conjunction with the purchase of a new piece of equipment;

(d)   Upgrade of computer skills;

(e)    Training for the ICD-10-CM/PCS diagnostics classification system (regardless of whether the employee works for a for-profit or non-profit employer);

(f)    Training from a national, regional, or state trade association that offers an independently certified training curriculum and testing; and Training for improved process efficiency (e.g. ISO-9000, Six Sigma or Lean Manufacturing).

2.  Ineligible Training Costs.  The following training costs are not eligible under the Program:

(a)    Continuing Education Units (CEUs) required for continued professional certification;

(b)   Soft Skills (e.g. diversity, ethics, HR law, management and leadership, sexual harassment, etc.);

(c)    Training which is reimbursed/required by other public agencies or departments (e.g. OSHA, Worker’s Compensation);

(d)   General Equivalency Diploma (GED);

(e)    Profit-oriented courses (e.g. sales, marketing research, and Dale Carnegie trainings);

(f)    Conference fees;

(g)   Wages of trainees while being trained; and

(h)   Travel costs.

3.  Eligible Employers.  The employer must be in one of the following industries:

• Advanced Manufacturing
• Aerospace and Aviation
• Automotive
• BioHealth
• Corporate Headquarters
• Energy
• Financial Services
• Food Processing
• Information Technology and Services
• Polymers and Chemicals

4.  Eligible Employees.  The employee  is someone who is directly employed by the company at a facility located within Ohio and meets all of the following requirements:

(a)    Employed in any of the following business functions: production, back office operations, information technology, logistics, or research and development;

(b)   Earning an hourly wage of at least 150 percent of the federal minimum wage ($10.88 as of January 1, 2012) plus benefits;

(c)    An Ohio resident;

(d)   At least 18 years of age; and

(e)   Working at least 25 hours per week.


For more information or to complete an on-line Application, you can go to the Ohio Development Services website at: http://development.ohio.gov/bs/bs_wtvp.htm or contact Shannon Vanderpool, Business Services Coordinator at (614) 644-8560 or Shannon.Vanderpool@development.ohio.gov.  Please call or contact me at Jsenney@pselaw.com or 937-223-1130 if you have any more questions or need assistance.

AND ONE MORE THING.  The 2012 Taxpayer Relief Act will prevent many of the tax hikes that were scheduled to go into effect this year and retain many favorable tax breaks that were scheduled to expire, but will also increase income taxes for some high-income individuals and slightly increase transfer tax rates from 2012 levels. Further, the Act extends a host of expired and expiring tax breaks for businesses and individuals, and also adds a number of new provisions to the Code.  More about this will be coming out in a future blog.  Call me at Jsenney@pselaw.com or 937-223-1130 if you have questions and can’t wait.

Compromise Bill Avoids/Defers Fiscal Cliff

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As you know by now, Congress approved a compromise bill intended to avoid the large tax increases and budget cuts that were otherwise scheduled to take effect in 2013. The bill raises taxes by about $600 billion over 10 years and delays for two months across-the-board cuts to the federal budget.

Income Tax
The bill extends the current income tax rates on incomes up to $400,000 for individuals, $450,000 for couples. Taxpayers with earnings above those amounts would be taxed at a rate of 39.6%, up from the current 35%. The bill also extends the current caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.

Estate Tax
Under the bill, estates would be taxed at a top rate of 40%, with the first $5 million in value exempted for individual estates and $10 million exempted for family estates. In 2012, such estates were subject to a top rate of 35%.

Capital Gains and Dividends
Under the bill, the tax rate on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for joint-filers would increase from 15% to 20%.

Alternative Minimum Tax
The bill permanently addresses the alternative minimum tax and indexes AMT for inflation.  This change is expected to prevent 30 million middle and upper-middle income taxpayers from being subject to AMT.

Unemployment Benefits
The bill extends jobless benefits for the long-term unemployed for another year.

Medicare Reimbursements for DoctorsThe bill delays a 27% cut in Medicare reimbursements to doctors for one year.

Social Security Payroll Tax Cut
The bill eliminates the 2% payroll tax cut that was enacted two years ago, thereby restoring the payroll tax to 6.2%.

IRAs
401(k) and other defined contribution retirement plans could provide plan participants with a newly expanded opportunity to convert their pre-tax savings in plans into Roth savings.  The IRA charitable rollover provision would be extended for 2012 and 2013 (with special ability to make use of the provision for 2012 distributions).

Other Changes
The bill extends for 5 years the child tax credit, earned income tax credit, and the $2,500 tax credit for college tuition.  The bill also extends for 1 year accelerated "bonus" depreciation of business investments in new property and equipment, the tax credit for research and development costs and the tax credit for renewable energy.

Across-the-Board Cuts
The bill delays for two months across-the-board spending cuts worth an estimated $109 billion set to start striking the Pentagon and domestic agencies.  Cost of $24 billion is divided between spending cuts and new revenues from rules changes on converting traditional individual retirement accounts into Roth IRAs.


AND ONE MORE THING.  Don’t forget that that the recent compromise bill does not affect the 3.8% Medicare tax on “net investment income” that was imposed starting in 2013 by the 2010 Affordable Health Care Act.  The tax is generally levied on nonbusiness income from interest, dividends, annuities, royalties, rents, and capital gains of taxpayers with adjusted gross income in excess of $250,000 (for joint filers) or $200,000 (for single filers).  So in 2013, taxpayers with incomes over the income thresholds will be paying tax on capital gains and dividends at a combined rate of 23.8%.

DEDUCTIBLE CHARITABLE DONATION REQUIREMENTS

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Individuals and businesses making deductible contributions to charity need to be aware of the charitable deduction requirements.    To be deductible, donations of clothing and household items generally must be in good used condition or better.  A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

To deduct any donation of money, by cash, check, electronic funds transfer, credit card or payroll deduction, a taxpayer must have a written bank record, pay stub or other written communication from the charity and/or employer showing the name of the charity, the pledge amount, and the date and amount of the contribution.  The taxpayer is also required to obtain an acknowledgment from a charity for each deductible donation of $250 or more.

To help taxpayers , a recent IRS announcement offers the following additional reminders:

• Contributions are deductible in the year made. Donations charged to a credit card before the end of 2012 count for 2012.  Likewise, checks count for 2012 as long as they are mailed in 2012.
• You need to check that the organization is qualified. Only donations to qualified organizations are tax-deductible.  The IRS maintains a searchable online database listing most organizations that are qualified to receive deductible contributions. In addition, most churches, synagogues, schools and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
• For individuals, only taxpayers who itemize their deductions can claim deductions for charitable contributions.
• For all donations of property, including clothing and household items, you should get from the charity, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property.
• Your deduction for a motor vehicle, boat or airplane which you donate to charity, and which is intended to be sold by the charity, is generally limited to the gross proceeds of the sale.
• If the amount of your deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be attached to your tax return.
• It is important to keep good records and receipts.

 If you have any questions about the charitable deduction requirements, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

 AND ONE MORE THING.  The IRS has recently released a changed  Voluntary Classification Settlement Program.  Whether a worker is an independent contractor or employee is determined by whether the company he works for has the right to control and direct him regarding the job he is to do and how he is to do the job.  Multiple factors are used to determine if a worker is an employee or contractor.  Section 530 of the 1978 Revenue Act provides relief from employment tax liability for employers who misclassified workers as independent contractors. But under Section 530, this relief applies only if:

1. The taxpayer does not treat the worker in question or any similarly situated worker as an employee for any period;
2. all federal returns required to be filed by the taxpayer with respect to the worker for such period are filed on a basis  consistent with the taxpayer's treatment of the worker as a nonemployee; and
3. The taxpayer had a “reasonable basis” (such as a court case or IRS rulings, a past IRS audit, or a long-standing practice of a significant segment of the relevant industry) for not treating the worker as an employee.

The IRS had previously instituted a Program granting relief to taxpayers based on the Section 530 requirements. The IRS has now issued an Announcement granting relief to taxpayers that didn't qualify for the Program solely because they had not filed all required Forms 1099.  In addition, the IRS recently amended the Program eligibility requirements to: (1) allow a taxpayer under IRS audit (other than an employment tax audit) to be eligible to participate in the program; and (2); eliminate the requirement that a taxpayer agree to extend the statute of limitations for employment taxes in order to participate in the program.

If you are interested in learning more about the Voluntary Classification Settlement Program or have questions about how to correctly classify workers for employment tax purposes, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

Shrinking Depreciation Deductions by Guest Blogger Todd Roberts

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Todd Roberts is a regular reader of SenneySays. Todd forwarded the following article he wrote on “Shrinking Depreciation Deductions.” This article is well-written and timely. There is still time to take advantage of the generous bonus depreciation and Section 179 depreciation deductions.  Check out Todd’s article below.

SHRINKING DEPRECIATION DEDUCTIONS (abridged and reprinted with permission)

 End of year tax planning for businesses is especially difficult for 2012 because many significant provisions are scheduled to expire and it is not clear what Congress intends to do.  The lack of certainty makes year-end planning more challenging.  However, business owners’ can still act to lower their taxes by taking advantage of the generous bonus depreciation and Section 179 expense deductions available thru the end of 2012.

Bonuses Depreciation Deduction Shrinks.  For most of the past decade, Congress encouraged business owners to invest in expansion and revitalization of their businesses by purchasing new property and equipment.  Most recently, the bonus depreciation provisions were expanded in 2010.  The law allowed first-year depreciation of qualified property equal to 100 percent in years 2008 – 2011.  A deduction of 50 percent of the asset’s cost is allowed for qualified property placed in service after 2011 and before January 1, 2013.  But property placed in service in 2013 is not eligible for bonus depreciation at all.   This will significantly reduce the first-year depreciation deduction on most business assets, thereby extending the time of cost recovery.  Companies that are contemplating investing in depreciable property should consider putting this new business equipment in service before December 31, 2012.

Vehicles.  For new passenger autos and light trucks used 100 percent for business and subject to the luxury auto depreciation limitations, the bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service in 2012.  Under current law, there is no bonus depreciation or extra $8,000 auto or light truck depreciation limitation after December 31, 2012.  Taxpayers can deduct up to $25,000 of the cost of new SUV, if it is rated at more than 6,000 pounds gross vehicle weight, as a business expense in the placed-in-service year.  In addition, the remaining cost of the new SUV place-in-service in 2012 is eligible for 50 percent first-year depreciation.

Expensing (Section 179).  A similar cost recovery provision in place for many years allows businesses to deduct some or all of the costs of acquiring depreciable assets, commonly called Section 179.  Unlike bonus depreciation, which is generally available to all businesses regardless of size and without limitation on the amount of business property acquired during the year, Section 179 is subject to several limitations that generally result in Section 179 expensing only for smaller and less capital-intensive businesses.  The maximum amount a business can expense for a tax year beginning in 2012 is $139,000 of the cost of qualifying property placed in service for the tax year.  The $139,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2012 exceeds $560,000 (the investment ceiling).  For tax years beginning in 2013, unless Congress makes a change, the expensing limit will be $25,000 and the investment ceiling will be $200,000.  The time of purchase does not affect the amount of the expensing deduction.  A business can purchase property late in the year and still get a full expensing deduction.  This means that if a business is thinking of purchasing in early 2013, they might want to accelerate the purchase to 2012.

Conclusion.  The bonus depreciation provisions and increased annual Section 179 deduction limits have reduced the after-tax costs of acquiring business property by accelerating the tax deductibility of some or all the costs of acquiring the assets over the past several years.  As a result, the provisions have proven very popular with businesses.  With favorable tax treatment still in place for 2012, businesses should contact their tax advisor to discuss the after-tax costs of acquiring depreciable business assets in 2012 versus 2013.  Call me at Jsenney@pselaw.com or 937-223-1130 if you have any ideas for an article or would like to submit one yourself.



AND ONE MORE THING.   Ohio has recently amended its corporate dissolution statute. If you are owed money by a corporation that is dissolving, you can be adversely impacted if you do not act in a timely manner.  The dissolving corporation is now required to give notice of dissolution to each known creditor and to each person that has a claim against the dissolving corporation. The notice will advise that you must file a claim for what you are owed and a deadline for filing the claim must be fixed. The deadline must be at least 60 days following the date the notice is given. The claim must be in writing and must “identify the claimant and contain sufficient information to reasonably inform the corporation of the substance of the claim.”  IF YOU DO NOT FILE A CLAIM BY THE DEADLINE THEN ANY CLAIM YOU HAVE AGAINST THE DISSOLVING CORPORATION IS BARRED.  This is not something you can set aside until you have time to deal with it. Failure to file a timely claim is fatal.  if you have a claim against a corporation and receive a Notice of Dissolution, you need legal counsel to advice on the technicalities of the new statute or you may have your claim barred.  Please contact one of our Business Attorneys at 937-223-1130 for guidance on these matters.

Avoiding the New Additional 0.9% Medicare Tax

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Under the Patient Protection and Affordable Care Act, starting in 2013, a new 0.9% Medicare surtax will be imposed on wages and self-employment (SE) income in excess of certain modified adjusted gross income thresholds. These threshold amounts are $250,000 for joint filers, $125,000 for married-filing separate filers and $200,000 for all other taxpayers.  The employer portion of the Medicare tax is not increased.

The additional 0.9% medicare tax applies to wages and self-employment income.   Partnership income allocations are considered self-employment income.  S corporation distributions are not.  For this reason, taxpayers that are setting up a new business entity should strongly consider setting up an S corporation or an LLC taxed as an S corporation.  For the same reason, taxpayers who are currently operating as a partnership or an LLC taxed as a partnership, should strongly consider converting to an LLC taxed as an S corporation.  The conversion from partnership tax format to S corporation tax format can generally be done with little or no tax consequences.

Other creative strategies that taxpayers are implementing to reduce self employment income include: renting real property to the taxpayer’s business so cash can be distributed as rent versus wages, and hiring family members in the business to distribute the income among more persons and stay under the thresholds.

If you have any questions about the additional 0.9% Medicare tax that will be imposed starting January 1, 2013, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.    The IRS has also released rules for the additional investment income surtax that was passed Congress as part of the 2010 healthcare reform law.  The 3.8 percent surtax on investment income goes into effect in 2013 and applies only to capital gains and dividend income.  It is unclear how rental income will be treated under the new rules.  The surtax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.   If you have questions or comments on the new 3.8% surtax, please give us a call at 937-223-1130 or Jsenney@pselaw.com.

Additional Medicare Tax Goes into Effect in 2013

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The IRS has issued guidance on the new rules that impose an additional 0.9% Medicare tax on wages and self-employed income above a threshold amount received in tax years beginning after Dec. 31, 2012.  The guidance comes in the form of 47 pages of Regulations.  The new tax is in addition to the regular Medicare rate of 1.45% on wages received by employees with respect to employment. The tax only applies to the employee portion of the Medicare tax. The employer Medicare tax rate remains at 1.45%, and the employer and employee Social Security tax remain at 6.2%.

Employer.  For 2013, an employer pays a 7.65% FICA tax, consisting of:

    6.20% Social Security tax on the first $113,700 of an employee's wages, plus
    1.45% Medicare tax on the employee's total wages.

Employee.  For 2013, an employee pays:

    6.20% Social Security tax on the first $113,700 of wages, plus
    1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns), plus
    2.35% Medicare tax on all wages in excess of $200,000 ($250,000 for joint returns).

Self-Employed.  For 2013, the self-employment tax imposed on self-employed people consists of:

    12.40% OASDI on the first $113,700 of self-employment income, plus
    2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 for a joint return), plus
    3.80% on all self-employment income in excess of $200,000 ($250,000 for a joint return).

Withholding.  Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. The employer need not notify the employee that additional withholding has commenced. Where a payment to an employee causes him to exceed the $200,000 threshold, the additional withholding tax applies only to the portion of the payment that exceeds the threshold.   The 0.9% additional Medicare tax may be owed on the employee's income tax return where withholding is not collected for it.  For example, the employee would have to pay the additional tax with his or her income tax if the employer failed to withhold.  The employee would also have to pay the additional tax if husband and wife both have wages below $200,000, but together are in excess of $250,000.

Various Benefits Subject to the Additional Tax.  The additional Medicare tax applies to “wages” in excess of the thresholds.  But the regulations make it clear that “wages” include not just cash compensation from the employer, but also taxable noncash fringe benefits, group term life insurance in excess of $50,000, nonqualified deferred compensation, tips and other forms of employee fringe benefits.

Self-employed Persons Who also have Wages.  Calculating the additional Medicare tax for taxpayers (single or joint) who have both self-employment income and wages is a bit bore complex.  Such taxpayers calculate their liabilities for the additional Medicare tax as follows:

    Calculate the additional tax on wages over the applicable threshold for their filing status.
    Reduce the applicable threshold for their filing status by the amount of wages received.
    Calculate the additional Medicare tax on self-employment income over the reduced threshold.

If you have any questions about the additional Medicare tax that will be imposed starting January 1, 2013, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.    The IRS has also released rules for the additional investment income surtax that was passed Congress as part of the 2010 healthcare reform law.  The 3.8 percent surtax on investment income goes into effect in 2013 and applies only to capital gains and dividend income.  It is unclear how rental income will be treated under the new rules.  The surtax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.   More on this in a future blog.  If you have questions or comments on the new 3.8% surtax, please give us a call at 937-223-1130 or Jsenney@pselaw.com.

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.