SenneySays

Tuesday, January 29, 2013

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.

Friday, January 18, 2013

Guest Blogger Sarah Carter – Ohio BWC Workplace Wellness Program Grant

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.

Sunday, January 13, 2013

Estate and Gift Tax Changes Enacted

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.

Tuesday, January 8, 2013

Ohio Incumbent Workforce Training Voucher Program

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.

Wednesday, January 2, 2013

Compromise Bill Avoids/Defers Fiscal Cliff

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%.

Friday, December 28, 2012

DEDUCTIBLE CHARITABLE DONATION REQUIREMENTS

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:

The taxpayer does not treat the worker in question or any similarly situated worker as an employee for any period;
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
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.

Monday, December 17, 2012

Shrinking Depreciation Deductions by Guest Blogger Todd Roberts

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.

Wednesday, December 12, 2012

Avoiding the New Additional 0.9% Medicare Tax

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.

Tuesday, December 4, 2012

Additional Medicare Tax Goes into Effect in 2013

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.

Thursday, November 29, 2012

Harvesting Tax Gains – Guest Blogger Todd Roberts, CPA

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.

Wednesday, November 28, 2012

Are Owners Personally Liable for Corporation or LLC Obligations?

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.

Monday, November 19, 2012

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.

Tuesday, November 13, 2012

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.

Tuesday, November 6, 2012

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.

Tuesday, October 30, 2012

Is Your Advance Debt or Equity? It Matters.

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Business owners often make capital contributions or loans to their corporations. Debts are paid to creditors including owner-creditors before distributions are made to owners. So when cash flow is tight or insufficient, having a clear distinction between loans and contributions is important in deciding who gets paid first and how much.
Knowing the difference between debt and equity is also important for tax purposes. Unpaid debts can give rise to a tax deduction when the debt becomes worthless. Unreturned equity can only give rise to a capital loss. Further, drawing a distinction between a business bad debt and a non-business bad debt can be critical.
If a corporation is unable to repay a business debt, the non-corporate business owner can deduct the unpaid debt against ordinary income as a business bad debt in full in the year the debt becomes worthless. But if the debt is not a business debt, the unpaid advance is treated as a short term capital loss and can only be deducted against ordinary income to the extent of $3,000 per year.
In a recent case, the Court of Appeals for the 9th Circuit concluded that a CEO, who was also a Director and minority Shareholder, could not take a bad debt deduction for advances he made to the corporation. The court in this case found that the advances were equity investments in the corporation and not bona fide debt. In making this determination, the Court of Appeals referred to the following factors:

The labels on the documents evidencing the indebtedness;
The presence or absence of a maturity date;
The source of payment;
The right of the lender to enforce payment;
The lender's right to participate in management;
The lender's right to collect versus right of unrelated creditors;
The parties' intent;
The adequacy of the borrower's capitalization;
Whether the owners' advances are in the same proportion as their equity ownership;
The payment of interest out of only money available for distribution to owners; and
The borrower's ability to obtain loans from outside lenders.

If you intend to advance money to your corporation, you should take the time to prepare promissory notes and other loan documentation to evidence the loan as a business debt. Documenting the advance as a loan will give you priority over the other owners and, to the extent you take a security interest, may give you priority over unsecured creditors. Evidencing the advance as a debt may also entitle you to claim a business bad debt deduction if the debt is not repaid in full. Call or email me at jsenney@pselaw.com or 937-223-1130 if you would like some help with loan documentation or want to discuss this matter further.

AND ONE MORE THING. Under Ohio law, a “responsible party” is liable for unpaid trust fund taxes such as sales tax or income tax withholding. This liability extends to late filing charges, interest and penalties as well. The tax authorities often attempt to treat all officers of a corporation as responsible parties. If you are a corporate officer, you want to make sure all trust fund taxes (and late filing charges, penalties and interest) are paid in full and on time. Give me a call or email if the IRS or state tax authorities are trying to collect from you as a responsible party.

Monday, October 22, 2012

Some Positive Tax News– Guest Blogger Joseph Mattera

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While we await possible major tax impacts from further implementation of President Obama’s health care legislation and continuation or lapse of the Bush tax cuts, there is some good news to report this week. Due to inflation adjustments, the IRS has announced several increases in various tax benefits in 2013 in the areas of gifting, the “kiddie tax” and retirement savings.

Currently, the annual gift tax exclusion is $13,000 per person per donee. This annual exclusion is the amount you can gift to any number of individuals per year with no gift tax implications. For example, if you have 3 children, you can gift each child up to $13,000 per year (total gifts of $39,000) under the current exclusion. Starting January 1, 2013, this annual exclusion amount increases to $14,000. While this $1,000 per person per donee increase seems small, remember that your spouse can double the annual exclusion amount by joining in the gift (or can make a gift in the same amount), and that you and your spouse can make annual gifts to any number of persons.

For tax year 2012, taxpayers can reduce a child’s unearned income subject to the “kiddie tax” by $950. For 2013, the number increases to $1,000. This will permit a child to earn $50 more before being taxed at their parents’ tax rates.

The maximum an employee can now contribute to a 401(k) plan is $17,000. In 2013, the number will increase to $17,500. Employees aged 50 and over may continue to contribute an additional $5,500 per year, bringing their maximum to $23,000 per year starting in 2013.

If you have any questions or comments about these tax benefits, please call or email Joseph Mattera at Jmattera@pselaw.com or 937-223-1130.

AND ONE MORE THING. The BWC offers grants to employers under the Safety Intervention Grants Program, the Drug Free Safety Program, the Workplace Wellness Grant Program and the Transitional Work Grants Program. Sarah Carter can provide more information about these grant programs. If you have any questions or comments about any tax or business matter, please call or email me or Sarah Carter at Scarter@pselaw.com or Jsenney@pselaw.com or 937-223-1130.

Tuesday, October 9, 2012

Now is a Good Time to Borrow Money from Yourself

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Want to take a bunch of money out of your corporation but don’t want to pay all the taxes that would apply if you took out a dividend or paid yourself a bonus? Consider borrowing the money from your corporation.

The IRS publishes applicable federal rates (“AFRs”) each month. The AFRs are the minimum interest rates that the IRS requires be charged on demand and term loans in various situations. The extremely low interest rate environment of the last several years has produced extremely low AFRs. For example, for the month of October, the short-term AFR (3 years or less) is 0.23% and the mid-term AFR (more than 3 but less than 9 years) is 0.93%. The long-term AFR (more than 9 years) for October with monthly or quarterly compounding is 2.34%.

Based on the AFR rates for October, you could have your corporation loan you significant dollars for a term of less than 9 years and pay interest on such money at the rate of only 0.93%. This is way better than taking a taxable bonus or dividend. Especially if you, like many other small business owners, expect to make additional capital contributions to the corporation from time to time in the future.

But you need to steer clear of pitfalls. The loan must be set up properly to avoid having the loan characterized as a taxable dividend or compensation payment. Some of the key factors for determining when a bona fide loan exists are:

(1) Whether there is a cap on how much can be advanced to the owner.

(2) Whether the owner gives collateral for the loan. Such collateral could be a pledge of the owner’s stock.

(3) Whether the owner is financially able to repay the loan. The owner’s stock in the corporation, other unrelated assets and salary as an employee of the corporation is considered in making this determination.

(4) Whether there is a repayment schedule and whether the owner made any repayments.

(5) Whether there is a definite maturity date.

(6) Whether the corporation makes any effort to collect the loan when due.

(7) The size of the loan.

(8) Whether the owner controls the corporation.

(9) Whether the corporation has any earnings and dividend payment history.

(10) Whether the loan is evidenced by a promissory note.

(11) Whether the corporation recorded and reported the loan on its accounting records and tax returns.

Give me a call or email at 937-223-1130 or jsenney@pselaw.com if you have any questions or comments about shareholder loans, or if you would like some help with properly structuring your loan arrangement.

AND ONE MORE THING. Don’t forget capital loss carryovers you have from prior years. You can only deduct $3,000 a year of capital loss against active income. But you can deduct an unlimited amount of capital loss carryover against capital gains. So make sure you consider realizing some capital gain to offset against your suspended capital losses. If you are holding appreciated stock that you could sell at a gain, but you want to retain such investment, consider selling the stock to realize the gain, and then repurchasing the stock. The wash sale rules only apply to losses so you can sell and repurchase at the same price on the same day. Give me a call or email at Jsenney@pselaw.com or 937-223-1130 if you want to talk about year-end tax planning.

Tuesday, October 2, 2012

Related Party Sale May Have Unexpected Results

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Sale, exchange or distribution of appreciated property between related parties can create certain adverse tax consequences for sellers including recharacterizing capital gains as ordinary income, denying installment sales reporting, disallowing realized losses and restricting the use of like-kind exchanges.

Gain on the sale of depreciable real property held for more than one year can be subject to three (3) different tax rates. Depreciation recapture is taxed as ordinary income at a max rate of 35%. Unrecaptured gain on depreciable real property is taxed at a max rate of 25%. And long-term capital gain is taxed at the capital gain rate (currently at a max rate of 15%).

In addition, under Internal Revenue Code section 1239, gain that would otherwise be treated as capital gain is converted to ordinary income if the property was depreciable and was sold, exchanged or distributed between related parties. This rule applies to property that can be depreciated by the buyer, whether or not the seller could depreciate the property and whether or not the buyer chooses to depreciate the property. The special rule of section 1239 does not apply to property such as raw land which is not depreciable.

When applying the depreciation recapture rules and the special rule of section 1239 to a related party sale, the seller first allocates the gain on sale of the property between the depreciable property and the non-depreciable property. The seller then applies the depreciation recapture rules to the portion of the gain attributable to the depreciable property. The remainder of the gain on the depreciable property if any is then treated as ordinary income under section 1239.

For purposes of section 1239, “related parties” include a taxpayer and all controlled entities. In determining who are related parties, the constructive stock ownership rules apply. Similar but different rules apply where the property is held by a partnership. More about that in a future blog. Please call or email me at 937-223-1130 or Jsenney@pselaw.com if you have any questions or comments.

AND ONE MORE THING. The federal estate tax exemption in 2012 is $5,120,000. The federal estate tax exemption is scheduled to return to $1,000,000 in 2013. With this in mind, some people are gifting real estate and other appreciated assets to their children and grandchildren this year. And to get even more bang for the buck, people are contributing these appreciated assets to an LLC or other closely-held company, and then gifting ownership interests in the LLC rather than gifting the appreciated asset itself. The reason? Valuation discounts of 30 to 40% can be taken when gifting a minority interest in an LLC rather than gifting the appreciated asset itself. If you are interested in doing some end of year gifting, please give me a call. Jsenney@pselaw.com or 937-223-1130

Monday, September 24, 2012

Determining Full-Time Status under Affordable Care Act

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The Affordable Care Act, imposes a penalty on an “applicable large employer” that either fails to offer its full-time employees and their dependents the opportunity to enroll in certain minimum essential and/or affordable care coverage. The ACA defines an applicable large employer, with respect to any calendar year, as an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year. For this purpose, the term “full-time employees” means the sum of the employer's full-time employees and full-time equivalent employees. The IRS has now issued Notice 2012-58 which provides guidance on the determination of full-time status.

Existing Employees: In a prior Notice, the IRS both described a possible approach to determining whether existing employees were full-time. This approach would permit employers to use an optional “look-back safe harbor period” to determine whether ongoing (rather than newly hired) employees are full-time. Practitioners responded favorably to this approach, and the IRS issued Notice 2012-58 which essentially adopts this approach. Under the look-back method, an employer determines each ongoing employee's full-time status by looking back at a standard measurement period (3 to 12 consecutive months) chosen by the employer. The employer gets to determine the months in which the standard measurement period starts and ends, subject to a requirement that it be uniform and consistent for all employees in the same job category. If the employer determines that an employee averaged at least 30 hours per week during the standard measurement period, then the employer would be required to treat the employee as a full-time employee during a subsequent “stability period” without regard to the employee's number of hours of service during such stability period. The stability period would be a period of at least 6 months that is no shorter than the standard measurement period, and that begins after the standard measurement period.

Recognizing that employers may need time between the standard measurement period and the stability period to determine which ongoing employees are eligible for coverage and to notify and enroll those employees, Notice 2012-58 provides an optional administrative period safe harbor. This administrative period following the standard measurement period and may last up to 90 days. However, the administrative period between the standard measurement period and the stability period may neither reduce nor lengthen the measurement period or the stability period.

New Employees: In a prior Notice the IRS had also described a possible approach to determining the full-time status of new employees working variable hours. A variable hour employee is an employee where, based on the facts and circumstances on the date the employee starts work, it cannot be determined if the employee will work an average of at least 30 hours per week. Under the possible approach described in the prior Notice, employers would be given 3 months (or 6 months in some cases), to determine whether a variable hour new employee is a full-time employee, without incurring a penalty under the ACA. After considering this possible approach, many practitioners requested that employers be allowed to use a look-back measurement period of up to 12 months. In response, the IRS expanded the proposed approach in a manner similar to that available for existing employees (by use of a 3 to 12 month look-back measurement period, a stability period, and the use of an administrative period). The same rules would also apply to seasonal employees. But once a new employee is employed for an entire measurement period, the employee must be retested for full-time status beginning with that standard measurement period at the same time and under the same conditions as other existing employees.

Reliance on the Notice: Employers may rely on the safe harbors contained in Notice 2012-58 for compliance with the ACA at least through the end of 2014.

If you have questions on how to determine full-time status of your employees for purposes of the ACA, or otherwise how to comply with the ACA, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING. We all face the prospect of a darker tax climate in 2013 for investment income and gains. Under current law, higher-income taxpayers will face a 3.8% surtax on their investment income and gains. Additionally, if the "tax break" sunsets go into effect, all taxpayers will face higher taxes on investment income and gains, and the vast majority of taxpayers also will face higher rates on their ordinary income. Plus, the tax break sunsets will increase estate and gift taxes. As a result, year-end gifts to family members can yield even greater overall family tax savings than in prior years. Give me a call if you want to discuss gifting property or investments to your children or grand-children. Jsenney@pselaw.com or 937-223-1130.

Friday, September 21, 2012

False Claims Act

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The False Claims Act is a federal law that imposes liability on contractors who defraud governmental programs. The law includes a provision that allows people who are not affiliated with the government to file legal actions on behalf of the government. These whistleblowers are eligible to receive a portion (15–25%) of any damages recovered. Claims made under the law often involve health care, military and other government spending programs. The federal government has recovered tens of billions of dollars under the False Claims Act since 1987.

Under the Act, a person is liable when he or she improperly receives payment from, or avoids payment to, the federal government. The Act prohibits:

Knowingly presenting, or causing to be presented a false claim for payment or approval;
Knowingly making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim;
Conspiring to commit any violation of the False Claims Act;
Falsely certifying the type or amount of property to be used by the government;
Certifying receipt of property on a document without completely knowing that the information is true;
Knowingly buying government property from an unauthorized officer of the government, and;
Knowingly making, using, or causing to be made or used a false record to avoid, or decrease an obligation to pay or transmit property to the government.

The most frequent claims involve situations where someone overcharged the federal government for goods or services. Other typical claims involve failure to test a product as required by government specifications or selling defective products.

Certain claims are not actionable, including: (a) certain actions against armed forces members, members of Congress, members of the judiciary, or senior executive branch officials; and (b) claims, records, or statements made under the Internal Revenue Code including tax fraud.

There are rather unique procedural requirements in False Claims Act cases. For example: (i) complaints under the False Claims Act must be filed under seal; (ii) complaints must be served on the government but must not be served on the defendant; and (iii) complaints must be supported by a detailed memorandum, not be filed in court, but be served on the government detailing the factual support for the complaint.

If you are a contractor dealing with the federal government, you need to be very careful when delivering or billing for services or products to avoid inadvertently violating the Federal Claims Act. If you would like to know more about the Federal Claims Act please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING. Under the federal income tax code, “S” corporations are not permitted to be owned by corporate shareholders. So “S” corporations cannot be part of a parent-subsidiary consolidated group of corporations. One way around this limitation is to use qualified “S” subsidiaries commonly referred to as “QSSS”. Call or email me if you have a question about QSSS. Jsenney@pselaw.com or 937-223-1130.

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