Social Security Benefits

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For many people, social security remains a significant part of their overall financial plan.  To be eligible for benefits, a person must have worked and paid into the Social Security Administration (SSA) system for at least 10 years (40 quarters) and have earned more than $4,640 per year (in today's dollars).   The amount you are eligible to receive can be determined from your SSA statement which is available online at www.ssa.gov.

To access your Social Security information online, you will need set up a SSA online account.  To verify your identity, the SSA website will ask you some personal questions.  The SSA system is  linked to the Experian credit reporting system.  Questions it might ask you include where do you work, what is your address, when was your current home built, and/or when did you last open an AMEX credit card.  If you answer any of the questions wrong it bars you out of the SSA system for 24 hours.

If you were born in 1960 or after, full retirement age is currently 67 ("FRA").  Some people may retire before they reach their FRA.  Others may want to wait until after they reach their FRA.  The earliest possible Social Security retirement age is 62.  Retiring at 62 causes a reduction to the benefit that would otherwise be paid if the person retired at FRA.   For each year up to age 70 that a person waits after FRA to retire, the social security benefit increases 8%.

There is no limit on the amount of money a person can earn after they reach their FRA.  If a person wants to collect Social Security before they reach their FRA, then the social security benefit is reduced if the person earns more than a threshold amount.  The threshold amount for 2013 is $15,150.

Planning for your retirement can be complicated.  Social Security is just one component.  You need to consider all of your assets, liabilities, income and expenses from all sources.  You also need to consider life style choices and family commitments.  Please contact me or one of our estate planning attorneys at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.  In previous blogs we talked about the importance of properly classifying workers as employees or independent contractors.  If you misclassify a worker as an employee, you perhaps will pay more in the way of payroll taxes and workers compensation premiums than would otherwise be required.  On the other hand, if you misclassify a worker as an independent contractor, you face the risk of being subject to significant payroll taxes, income tax withholding, penalties and interest.  A recent news release shows that US workers are filing a record number of federal lawsuits against employers alleging violations of wage and hour laws including misclassification of their status as independent contractors.  If you would like to discuss worker classification further, please contact me or Matt Stokely at 937-223-1130 or Jsenney@pselaw.com.

Tax on Unearned Income

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Effective in 2013, some individuals will be subject to a new 3.8% medicare contribution tax on unearned income.  The new tax applied to single taxpayers with modified adjusted gross income over $200,000 and to married taxpayers filing jointly with MAGI over $250,000.  The unearned income to which the tax applies includes interest, dividends, annuities, royalties, rents, passive income and other net investment income.

Investors might want to consider tax-free bonds since the interest on these bonds is not subject to the new tax.  Investors might also want to consider insurance products since the inside build-up of life insurance cash value is not subject to the new tax.   Investors should also maximize investments inside qualified retirement plans and IRAs since income/gain inside these vehicles is not subject to the new tax.

Income received by an individual from a business is subject to the new tax if the business is a passive activity for the individual.  But don't forget, if the new tax applies because the business constitutes a passive activity, the individual would not be subject to self-employment tax on the same income since self-employment tax only applies to earned income.   Furthermore, if an "S" corporation owner actively participates in the business, he or she can avoid both the new tax and self-employment tax on the dividend distributions he or she receives from the "S" corporation.

This can be a bit complicated.  Call or email me to discuss at Jsenney@pselaw.com or 937-223-1130.

Estate Planning for "Digital Assets" or Who Reads My Emails When I Die?

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Have you thought about what happens to all the emails, pictures, contacts, messages, phone numbers, email addresses, on-line accounts and other information on your personal and work cellphones and computers after you die?  Do you want anyone to have access to these “digital assets” after you die?  If so who should have access to what?  You  need to consider these digital assets as well as your other assets when doing your estate and succession planning.

What are Digital Assets?  Digital assets include any online account that you own or any file that you store on your computer or in the cloud.  Digital assets can include your on-line banking account, your e-mail accounts, your picture and video storage sites, your social networking sites, your domain names, your games and leisure sites, your business, professional, marketing and networking sites, your frequent flier mile and other award program accounts, and all your storage and backups.   Digital assets also include all the electronic information and data on your personal and business cellphones, laptops, I-pads, computers, hardware and software.

Passwords.  Many of your digital assets are protected by usernames, passwords, and security questions.  If these digital assets are to be easily accessible to your chosen beneficiaries, you need to make sure such access information is recorded and transferred to such beneficiaries.
Need to Plan.  It is important for many reasons to carefully plan for the eventual transfer of your digital assets.   These reasons include: (1) the uncertainty of existing digital asset privacy and other laws, (2) prevention of on-line identity theft, (3) making sure the right parties receive your digital assets, and (4) making sure others do not gain access to your digital assets.

No Body of Law.  Digital assets are a new phenomena.  There is no well-developed body of law that describes the rights and obligations of executors, agents, guardians, and beneficiaries with regard to digital assets.  Very few jurisdictions have dealt with this issue.  Facebook, Twitter, Linked-In and other on-line services have their own policies for how to deal with a user’s death or incapacity, but not all such services have developed policies, and the policies that are in place may not be consistent with your personal wishes.

Prevent On-Line Theft.  Proper planning for your digital assets can prevent on-line identity thefts.  When you die or are otherwise unable to monitor the activity on your on-line accounts, thieves have an opportunity to hack your accounts, open new credit cards in your name, obtain identification cards and make purchases and take other actions in your name.

Executor Needs Access.   Giving your trusted executor access to on-line to digital and other assets would greatly improve the efficiency of the administration of your estate.   Making sure the executor knows which bills you paid on-line or by automatic checking account deduction would help ensure these bills do not go unpaid and would make it easier for the executor to pay such bills.

Transfer of Digital Assets.  Some digital assets may not have any monetary value, but many may have personal or emotional value.  You may have established on-line photo albums and accounts that preserve photos and letters. If your family and friends do not know you have these assets or how to access these assets, these photos and letters may be lost forever.  And if no effort is may to protect these digital assets, the personal and emotional value attributable to these assets may be diminished or destroyed by addition or deletion of material by spammers and hackers.

Transfer to the Right People.  You may not want all your family and friends to have access to all your digital assets.  Emails and messages are often quick off-the-cuff posts or responses.  Some of your emails or messages may contain rude, crude or hurtful jokes, stories or rants that you did not really mean or that were meant only for the recipient.  If you are not careful about who gains access to your digital assets, the wrong people may gain access.

How to Plan for Digital Assets.   The first step in planning for digital assets is to do an inventory of these assets, including usernames, passwords, and answers to “secret” questions.   The next step is to determine for each digital asset whether such asset is subject to deceased/incapacitated user provisions and whether there are ways to change or opt out of such default provisions.

Using Wills or Trusts to transfer Digital Assets.  Wills can be used to transfer digital assets, but Wills are probably not the right place to handle disposition of digital assets or to list digital asset access information because such information changes from time to time and because Wills are eventually made public.  In addition, a Will transfers ownership and control of the digital assets to named-beneficiaries immediately when the Will is probated (rather than maintaining ownership and control in the hands of a trustee).    A Trust is probably a more appropriate location to include the transfer of digital asset provisions because a Trust can be changed more easily and because it does not become part of the public record.   The use of a Trust also gives you the ability to have your digital assets maintained and controlled after your death for so long as appropriate by a trustee you name.

Storing Access Information.  While Wills and Trusts can be used to transfer digital assets, they are not the best place to store the access information.  It is advisable to prepare a separate document with all of the access information related to your digital assets.  This separate document would be a list of all of your digital assets including your on-line accounts, passwords, security questions, and answers.  This separate document could also designate who gets access to which asset, and which assets get deleted.  This separate document can be in writing, but it also could be stored electronically on  a computer data file, USB flash drive, or in a cloud.

During your lifetime you are creating a wealth of electronic information about yourself, your family and  your friends.  Some of this you may want to pass on.  Some of this you for sure do not.  If you would like to speak with me or one of our estate planning attorneys about how to handle your digital assets please give us a call at 937-223-1130 or Jsenney@pselaw.com.


AND ONE MORE  THING.  PS&E is sponsoring a FREE   seminar at Dayton Country Club on Wednesday May 22 from 7am to 9 am on “Essential   Legal Documents, Planning Considerations and Legal Updates for Every   Business.”   It is not too late to register.  But you need to hurry since space is limited.  You can register by clicking on the following link Register   Now! or by contacting Jan Burden at 937-223-1130 or Jburden@pselaw.com.

Importance of Competent Professional Help

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Sometimes you get what you pay for. And sometimes you don’t. In an effort to save a few dollars, some business owners prepare legal documents themselves, or buy one-size-fits-all documents off the internet, or get a friend of a friend to do the work for cheap. The results often are not what the business owner expected.


I encountered a recent situation where a business owner wanted to prevent a former employee from competing. At the time of hire, the business owner required each employee to sign a non-compete agreement. So far so good. The problem was that the language used to describe the non-compete restricted area was not properly worded. The business owner intended to restrict the employees from competing within a 5 mile radius of the existing business location. Unfortunately, the language in the non-compete agreement which defined the restricted area was based on a  5 mile circumference rather than a 5 mile radius. This improper wording had a dramatic effect. The restricted area is approximately 78.5 square miles if the restricted area is based on a radius of 5 miles from the existing location.   But the restricted area is less than 2 square miles if the restricted area is based on a 5 mile circumference around the existing location. This is a huge difference. This drafting fiasco could have been avoided.


Please call or email me or Matt Stokely if you would like us to review or help you draft a non-competition or non-solicitation agreement at 937-223-1130 or Jsenney@pselaw.com.


AND ONE MORE THING.  The IRS has issued a press release (IR 2013-49) reminding tax-exempt organizations to file their Form 990 annual return by May 15, 2013 or risk having their tax-exempt status revoked.  Contact Jeff Senney at 937-223-1130 or Jsenney@pselaw.com if you would like a copy of IR 2013-49 or have any questions about establishing a tax-exempt organization or filing the annual return.

Internet Sales Tax Legislation

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Over the years, states have attempted to impose sales tax collection responsibility on out-of-state retailers.   As laid out in numerous court cases over the years, states cannot impose sales tax collection responsibility on a retailer unless the retailer has “nexus” with the state.   For this purpose, nexus has meant means some physical contact or connection between the retailer and the state such as having business assets, employees, or offices in the state.  In the past, merely contacting customers by phone, mail, internet or traveling salesmen has not been enough to impose sales tax collection responsibilities.   This worked to the advantage of out-of-state retailers who did not have to charge and collect sales tax, and to the disadvantage of traditional brick and mortar retailers located within the taxing state.  Big retailers with stores all over the country like Wal-Mart, Best Buy and Target have been required to collect sales taxes when they sell products over the Internet. But online-only retailers like eBay and Amazon have not been required to collect sales taxes except in states where they have offices, distribution centers or other physical presence.


But all that is changing.  The US Senate has sided with traditional retailers and financially strapped state and local governments by passing legislation that would subject online-shopping to state sales tax.


Internet giant eBay is leading the fight against the legislation, along with lawmakers from states with no sales tax and certain anti-tax groups. The bill's opponents say it would put an expensive obligation on small business because they are not equipped to collect and remit sales tax to many different state and local governments at many different rates.   Under the legislation, businesses with less than $1 million in online sales would be exempt.   But eBay wants to exempt businesses with up to $10 million in sales or fewer than 50 employees.


Many governors, both Republicans and Democrats, have been lobbying the federal government for many years for the authority to collect sales tax from online retailers.  While under most state laws the consumers have an obligation to pay a “use” tax if the retailer does not collect a sales tax on their purchase, most consumers do not comply.  And it is not generally cost-effective for the states to chase individual consumers for use tax on small purchases.


This issue continues to grow as more people make purchases online.  Last year, Internet sales in the U.S. totaled over $226 billion according to government estimates.  States lost a total of $23 billion last year because they could not collect taxes from out-of-state retailers.  Supporters say the bill makes it relatively simple for Internet-only retailers to comply.  States are required to provide free computer software to help retailers calculate sales taxes, based on where shoppers live. States must also establish a single organization to receive the Internet sales tax revenue, so retailers don't have to send it to individual counties or cities.

Give me  a call or email if you want to talk about the new legislation or have any sales or use tax questions at Jsenney@pselaw.com or 937-223-1130.



AND ONE MORE THING.  Let’s give a hand to Tony Desjardins and the gang at UDECX, LLC who  won the prestigious Soin Award for Innovation at the recent 2013 Dayton Chamber of Commerce Annual Meeting.   UDECX has developed and is marketing the only modular, portable, and completely DIY patio decking product on the market today.  If you are interested in learning more about UDECX, check out their website.

IRS Voluntary Compliance Program - Correcting Plan Failures

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In order for a retirement plan to be treated as a qualified retirement plan and enjoy the benefits of such status (contributions deductible to employer, employees not taxable on contributions until distributed, employees not taxable on appreciation of investments), the plan must meet all of the requirements set forth in the Internal Revenue Code.  Some of these requirements relate to the form of the plan.  That is, the plan must contain certain provisions mandated by the IRC.  Other requirements related to the operation of the plan.  That is, the plan must operate in accordance with the terms of the plan and with the IRC.  Failure to operate a plan in accordance with terms and the IRC could lead to the plan being disqualified.  In this event all of the plan contributions could be considered as taxable income to the plan participants.

Operating and maintaining a qualified retirement plan can be quite complex.  It is not unusual for a plan to suffer an operational failure.  Some of these failures are minor and infrequent.  Other failures may be more serious or egregious.   To encourage employers to correct plan failures and give employers comfort that the correction will be acceptable to the IRS, the IRS has a program (set forth in Revenue Procedure 2013-12) that outlines how certain plan failures can be corrected.

Under Revenue Procedure 2013-12, depending on the type of plan failure involved, there are three possible ways that the plan failure might be corrected. These correction methods include:

Self-correction (SCP). A Plan Sponsor that has established compliance practices and procedures may, at any time without paying any fee or sanction, correct insignificant Operational Failures under a Qualified Plan, a 403(b) Plan, a SEP, or a SIMPLE IRA Plan. For a SEP or SIMPLE IRA Plan, however, SCP is available only if the SEP or SIMPLE IRA Plan is established and maintained on a document approved by the Service. In the case of a Qualified Plan that is the subject of a favorable determination letter from the Service or in the case of a 403(b) Plan, the Plan Sponsor generally may correct even significant Operational Failures without payment of any fee or sanction if the correction is made within certain time periods.

Voluntary correction with Service approval (VCP). A Plan Sponsor, at any time before audit, may pay a limited fee and receive the Service’s approval for correction of a Qualified Plan, 403(b) Plan, SEP, or SIMPLE IRA Plan failure. Under VCP, there are special procedures for Anonymous Submissions and group submissions.

Correction on audit (Audit CAP). If a failure (other than a failure corrected through SCP or VCP) is identified on audit, the Plan Sponsor may correct the failure and pay a sanction. The sanction imposed will bear a reasonable relationship to the nature, extent, and severity of the failure, taking into account the extent to which correction occurred before audit.

Whether a plan failure may be self-corrected, or corrected under the VCP program or must be corrected under the Audit CAP program depends on the type of failure, the frequency and the significance of the failure, and whether the failure was self-reported or discovered on audit.  The more often the failure, the more participants involved, the more plan years involved, and discovery of the error on audit reduce the chances the failure can be self-corrected (or even fixed under the VCP program).

If your retirement plan has suffered an operational failure, call or email Jeff Senney to discuss how the plan can be corrected at Jsenney@pselaw.com or 937-223-1130.



AND ONE MORE THING.  A frequent plan failure involves plan loans not being administered in compliance with the terms of the plan or the IRC.   The IRS does not currently recognize self-correction as a permitted correction method for a plan loan failure.  As a result, a plan loan failure must be corrected under the IRS’s VCP.  If the plan loan failure is not so corrected, the IRS requires the loan amount to be treated as a taxable distribution and reported on IRS Form 1099-R.  The IRS also requires the employer to pay the applicable income tax withholding related to such deemed distribution.   There might be other applicable penalties as well.  Call Jeff Senney to discuss any questions you have about correcting retirement plan operating failures at 937-223-1130 or Jsenney@pselaw.com.

Requirements of a Tax Free Corporate Division

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If a corporate split-up transaction does not meet the requirements of IRC section 355, the transfer of assets by the distributing corporation is treated as a taxable sale, and the distribution of the stock of the controlled corporation is treated as a taxable dividend.  In order for a distribution of stock of a controlled corporation to qualify under IRC section 355 as a tax-free transaction, the following requirements must be met:

(1)   The distributing corporation must control the corporation whose stock it distributes (“controlled corporation”) immediately before the distribution.  For purposes of these rules, control means ownership of (a) stock possessing at least 80% of the combined voting power of all classes of stock entitled to vote, and (b) 80% of the shares of each other class of the corporation's stock.


(2)  The distributing corporation must distribute all the stock of the controlled corporation it held immediately before the distribution.  However, if it can show that tax avoidance is not a principal purpose for retaining part of the stock of the controlled corporation, the distribution will be tax-free so long as a controlling interest in the controlled corporation's stock is distributed.

(3)  The transaction must not be used principally as a device for distributing the earnings and profits of either the distributing corporation or the controlled corporation.


(4)  The active trade or business requirement of IRC section 355(b) must be satisfied by both the distributing corporation and the controlled corporation.


(5)  There must be a corporate business purpose for the distribution.  Some examples of business purpose include: cost savings, risk reduction, resolution of management or other problems, providing equity interests to key employees, facilitating credit or borrowing, preparing for security offerings, preparing for transactions with competitors, getting ready for purchase of the distributing corporation, facilitating a purchase or acquisition  by the distributing corporation or the controlled corporation.


(6)  The distributing corporation must distribute only stock or securities of the controlled corporation to a shareholder in exchange for his stock.   However, if the other requirements listed above are met, and other property is distributed, the distribution will be tax-free except to the extent of the other property distributed


(7) The distribution or series of distributions is not part of a transaction after which either the distributing corporation or a controlled corporation is a disqualified investment corporation and a person holds immediately after the transaction a 50% or greater interest in any disqualified investment corporation that they did not hold immediately before the transaction.

If any one of the above requirements is not met, the transaction will fail to qualify as a tax-free reorganization, and the distributing corporation and/or the shareholders will be subject to income tax.  Call or email me at 937-223-1130 or Jsenney@pselaw.com if you have any questions about how to properly structure a tax-free corporate division or other reorganization transaction.


AND ONE MORE THING.  The local chapter of American Red Cross is organizing a gala, Putting on the Glitz, as a fundraiser to benefit disaster relief and preparedness in the Miami Valley. The event will take place Saturday, April 27, 2013 with the theme, "Providing Hope Like a Bridge Over Troubled Water."   The event is being run like a fashion show.  Jeff Senney is participating/competing in the show.   You can donate/vote for Jeff as “top model” by clicking on the donate link. Thanks for your support for this great cause

Considering a Spin-Off?

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Many corporations operate more than a single business.  Over time, many corporations branch off into different businesses. There is no law that prohibits a corporation from operating multiple different businesses operating inside the single corporate shell.  But doing so may not be wise.


Operating multiple businesses inside a single corporate shell puts the assets of a good business at risk to pay the debts of a bad business.


If you have employees that work on only one of the businesses, and you want to give these employees compensation or incentives based on the results of operations of such business, it is somewhat easier to accomplish if the businesses are run in separate corporate shells.   Or if in the future you think you might want to bring in family members to own/operate one but not all of the businesses it is also preferable to have the businesses run in separate corporate shells.


In order to split-up a corporation into two or more separate businesses, the first step is generally to drop the assets and liabilities that comprise each business into a separate subsidiary corporation.  The second step is to distribute the stock of the subsidiary corporation to the shareholders.  This type of reorganization transaction is sometimes referred to as a Type D divisive reorganization.    In order for such a split-up to be done on a tax-free basis, certain requirements must be met.  One of these requirements is that the businesses operated by the original corporation and the new corporations must have been active businesses for at least the last 5 years.  Another requirement is that immediately after the distribution, the new corporations must be controlled by one or more of the shareholders of the original corporation.   There are other requirements that also need to be met.


Doing a tax-free split up transaction is quite complex and should not be attempted without the aid of a competent tax professional.  Please call or email me at Jsenney@pselaw.com or 937-223-1130 to discuss any questions or comments you may have concerning a tax-free split up transaction.


AND ONE MORE THING.   Non-corporate taxpayers are permitted to make an election to exclude income resulting from discharge of real property business debt and reduce the basis of depreciable real property.   The IRS recently approved a request by a 50% partner in an LLC treated as partnership to grant the partner a 45-day extension to file an amended return to make such election.   If you need assistance with filing an election to exclude discharge of debt income, or in seeking IRS approval for an extension to file such election, please call me at 937-223-1130 or Jsenney@pselaw.com.

Succession Planning

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It is never too early to start thinking about succession planning.  All business owners eventually reach a point where they want to retire, they want to slow down, they want to try their hand at something new, they want to give the younger generation a chance to show their stuff or they just want to cash out.  In every case, it is a smoother and generally more profitable transition if the owners have taken the time to plan and think through what is required to successfully transition their business.


Succession planning may involve sale of the business.  But to whom?  To employees?  To family?  To suppliers?  To customers?  To competitors?  And for how much?  Is there a reasonable methodology for setting the value of the business?


Succession planning may involve gifts to spouse, children and grandchildren.  But are they competent to run the business?  Is the management staff competent and loyal enough to work with inexperienced family members while they come up to speed?


Succession planning may involve stock options or deferred compensation or other bonus arrangements for key employees designed to keep them on board after the owners have moved on.  Do you have a group of employees who have the experience and skill to run the business after you are gone?  Have you given them the ownership and/or compensation incentives needed to win their loyalty and keep them on board?


Succession planning may involve employee stock ownership plans ("ESOPs").  By using  a ESOP vehicle, business owners may be able to create a market for their stock where no market otherwise exists, and may be able to sell their stock to such ESOP in a tax-advantaged away.  But ESOPs are somewhat complicated and costly to set-up and maintain, and you need to consider whether the possible upfront tax savings are worth the cost and administrative complexities inherent in such arrangements.


There are many other issues related to succession planning that need to be considered including valuation of the company stock, use of valuation discounts, use of stock redemption or buy-sell agreements, use of employee non-compete agreements, training of future management, etc.  More about succession planning issues will follow in future blogs.  Please give me a call if you want to discuss succession planning and how we can help you.  Jsenney@pselaw.com or 937-223-1130.


AND ONE MORE THING.   The American Red Cross is an important part of our national disaster recovery system.  In light of the recent natural disasters and the terrorist attacks our country has endured, the importance of supporting Red Cross and its missions cannot be overstated.  Our local chapter of American Red Cross is organizing a gala, Putting on the Glitz, as a fundraiser to benefit disaster relief and preparedness in the Miami Valley. The event will take place Saturday, April 27, 2013 with the theme, "Providing Hope Like a Bridge Over Troubled Water."    You can  donate/vote by clicking on the donate link. Thanks for your support for this great cause.

Court Finds that State Worker Classification Law is Pre-Empted

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Classification of a worker as an independent contractor can be a less expensive option for the employer because it shifts the burden of paying payroll taxes, workers compensation premiums and health care insurance costs to the worker. Classification of workers as independent contractors also results in workers not being covered by overtime, wage and hour laws and minimum wage laws.  For these reasons, Federal and state government agencies often look closely at the classification of workers as employees or independent contractors.


Under the accepted common law, a worker is generally an independent contractor when the worker has a risk of financial loss and where the worker contains how the job is done. A worker is generally an employee where the worker has no risk of financial loss and the employer controls how the job is done. The IRS has broken this common law determination down into a 20-factor test. Often some factors point to a worker being an independent contractor while other factors point to the worker being an employee. For this reason it is often difficult to say with 100% certainty whether a worker is an employee or an independent contractor.   This determination is made even more difficult because some states have enacted statutes that include their own definitions and require employers to treat certain workers as employees.


But some relief to this recent explosion of state regulation of the worker classification issue may be on the horizon. A Federal District Court recently granted summary judgment in favor of a motor carrier company and found that the state law in question would have compelled the company to treat its workers as employees (and not as independent contractors) and was therefore pre-empted by the Federal Aviation Administration Authorization Act of 1994 ("FAAAA").


The FAAAA is a federal law which contains provisions regulating the price, route and services of various types of motor carriers including over the road motor carriers of property.  The FAAAA also provides that no state "may enact or enforce a law related to a price, route, or service of any motor carrier." The two operative phrases are "related to" and "prices, routes, or services."  However, the FAAAA offers little insight in terms of its breadth, and its preemption language does not explicitly encompass state regulation of wage and independent contractor laws.


The Court reviewed the FAAAA and its legislative history and concluded that the state worker classification law in question was preempted by the FAAAA because the state law relates to motor carriers' prices, routes, and services. The Court found that the state law was “related to” motor carrier prices, routes and services because the state law (1) dictated the form of employment relationship carriers must utilize, thereby affecting carriers' routes and services; (2) significantly increased motor carriers' costs and thereby had a significant effect upon the motor carriers' prices, routes, and services; and (3) materially altered the common law test for independent contractor status, thereby leading to a patchwork of varying state laws and resulting liability under varying independent contractor regimes.


Many states have their own version of wage and independent contractor laws. These need to be considered along with the IRS 20-factor test and the common law.  Misclassifying workers can cost your business money and can lead to costly penalties. If you have any questions or need assistance with a worker classification issue, please call or contact Matt Stokely, Jeff Senney or one of our other business attorneys at 937-223-1130 or JSenney@pselaw.com.


AND ONE MORE THING. The American Red Cross is organizing a gala, Putting on the Glitz, as a fundraiser to benefit disaster relief and preparedness in the Miami Valley. The event will take place Saturday, April 27, 2013 with the theme, Providing "Hope Like a Bridge Over Troubled Water. As a "model" for the Red Cross gala I need your support to meet my individual fundraising goal. You can check back on my personal page and track the progress made to reaching my final goal. Please donate and help show your support for this great cause.

IRS Publishes Annual List of Tax Scams

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The Internal Revenue Service has issued its annual list of tax scams, reminding taxpayers to use caution during tax season to protect themselves.  As you can tell from the lost, tax scams come in many forms.  Don't let a scam artist take advantage of you.  Set forth below is a summary of the IRS list of tax scams prevalent this tax season:

Identity Theft

Tax fraud through the use of identity theft tops this year’s list. Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

The IRS has a special section on the IRS.gov website dedicated to identity theft issues.  For victims, the website includes info on how to contact the IRS Identity Protection Specialized Unit.  For other taxpayers, the site includes information on how to protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

The IRS DOES NOT send email requesting personal ort financial information.  If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

Preparer Fraud

A majority of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else.  So it is important to choose carefully when hiring an individual or firm to prepare your return.  The IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).  The IRS has created a new web page to assist taxpayers  www.irs.gov/chooseataxpro.

Offshore Accounts

Over the years, some individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.  The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.  Taxpayers need to be aware that the IRS and DOJ are finding and prosecuting taxpayers in these situations.

“Free Money” from the IRS

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement – and are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly and members of church congregations with bogus promises of free money.  In the end, the victims discover their refund claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant.

Bogus Charities

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists may pretend to operate a bogus charity and contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

Donate only to recognized charities.
Be wary of charities with names that are similar to familiar or nationally known organizations. Go to the IRS.gov website and use the search feature Select Check, to find the names of legitimate qualified charities.
Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you.
Don’t give or send cash, use a check or credit card.
Inflated Income or Expenses

Some scam artists are preparing and filing tax returns which include income that was never earned, either as wages or as self-employment income in order to maximize refundable credits.  Overstating income or expenses to create a tax refund can lead to additional tax, penalties and interest.

False Refund Claims

Some of the scams are hard to believe.  In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.  The IRS warns taxpayers to be careful.  If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Zero Wage Claims

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.  Sometimes, these scammers even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation.

Disguised Business Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.  IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

If you want to share a horror story or have any questions about avoiding tax scams, give me a call or email at 937-223-1130 or Jsenney@pselaw.com.

SUMMARY.  If you have a large tax bill coming up, and you don't have the money sitting around to pay the tax bill, consider borrowing the money from your retirement plan.   A plan loan can be a relatively painless way of raising cash without adverse tax consequences.  But the plan loan must be set up correctly and repaid on time.  If you have any questions or want to know more about taking a plan loan from your qualified retirement plan account, please call or email me at 937-223-1130 or Jsenney@pselaw.com.

AND ONE MORE THING.  The American Red Cross is organizing a gala, Putting on the Glitz, as a fundraiser to benefit disaster relief and preparedness in the Miami Valley.  The event will take place Saturday, April 27, 2013 with the theme, Providing "Hope Like a Bridge Over Troubled Water.  As a "model" for the Red Cross gala I need your support to meet my individual fundraising goal.  You can check back on my personal page and track the progress made to reaching my final goal.  Please donate and help show your support for this great cause.

What Are Your Chances of Being Audited?

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The IRS has issued statistical data on its 2012 fiscal year activities.  This data provides valuable information about how many tax returns the IRS is likely to audit in future years, and what categories of returns the IRS will be focusing.  This data also provides insight into other IRS enforcement activities such as collections.  Overall there seems to be a slight downward trend in the percentage of returns being audited.

Percentage of Returns Audited.   Of the 144 million individual tax returns filed in 2011, less than 1.5 million, or about 1%, were audited in 2012. This is down from the prior year when 1.1% of the filed returns were audited in this period.   Of the total number of 2011 individual income tax returns that were audited in 2012, 487,408 (32.9%) were for returns claiming an earned income tax credit (EITC).  This was a small increase over the 483,574 (30.9%) of 2010 returns that were audited in 2011 for this reason.

Field Audits v. Correspondence Audits.  About 24.3% of the individual audits conducted in 2012 were field audits conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That is a slight decrease from the prior year when 25% of the audits were field audits.  The 75.7% balance of the audits conducted in 2012 were correspondence audits.

Audit Risk Higher if Return includes Business Income.  For individual returns with business income other than farm income showing total gross receipts of $100,000 to $200,000, 3.6% of returns were audited in 2012, compared to 4.3% in 2011.  For returns with business income other than farm income showing total gross receipts of $200,000 or more, 3.4% of returns were audited in 2012, compared to 3.8% in 2011.  For returns showing farm income, 0.5% were audited in 2012 compared to 0.6% in 2011.

 Audit Risk Lower if No Business Activity.  For individual returns showing total income of $200,000 to $1 million, 2.8% of returns NOT showing any business activity were audited in 2012, while 3.7% of returns showing some business activity were audited in 2012.  In 2011, the rate of audit for such returns not showing any business activity was 3.2% compared to 3.6% for returns showing business activity.  In 2012, the audit rate for all returns with total income of $1 million or more was 12.1%, compared to 12.5% for 2011.  Business activity shown on a return includes any Schedule C business as well as claiming home office and similar deductions.

Audit Risk Increases as Income Increases.  The data clearly shows that the audit rate in 2012 increased for higher income earners. The audit rate in 2012 was 0.85% for returns with adjusted gross income (AGI) between $100,000 and $200,000 (down from 1% for 2011), and 1.96% for those with AGI of $200,000 to $500,000 (down from 2.66% for 2011). The audit rate increased to 8.9% for those with AGI of $1 million to $5 million (down from 11.8% for 2011). The audit rate for 2012 as compared to 2011 also increased for taxpayers with AGI of $5 million to $10 million, as well as for those with AGI of $10 million or more.

C Corporation Audit Rate.   For all corporate returns other than Form 1120S, the audit rate in 2012 was 1.5%, same as in 2011.  For C corporations with total assets of $250,000 to $1 million, the audit rate in 2012 was 1.7% vs. 1.6% in 2011.  For C corporations with total assets of $1–$5 million, the audit rate was 2.1% vs. 1.9% in 2011.  For C corporations with net assets of $5–10 million, the audit rate was 2.6% vs. 2.6% in 2011.  For C corporations with returns showing total assets of $10 million or more, the overall audit rate in 2012 was 17.8%, up slightly from 17.6% for 2011.  For larger C Corporations, the audit rate increased with the size of the entity.

Partnership and S Corporation Audit Risk.  The 2012 audit rate for partnership and S corporation returns was 0.5%, as compared to 0.4% for 2011.  The 2012 audit rate for partnerships and S corporations was well less than the rate for C corporations.

Summary.  The good news is that the risk of audit in almost all categories has at least temporarily decreased slightly.  Individuals claiming an earned income credit, however, significantly increase their risk of audit.  Individual returns that include business activity also increase the risk of audit.  The higher the reported income, the higher the audit risk as well.  The point of studying and reporting these statistics is not to scare you or convince you not to take an aggressive position on an item of income or expense on your return.  Rather, the point is to make you aware that audits do occur, that they occur more often in certain situations, and that you want to be in a position to defend yourself if you happen to be audited.  Contact me at 937-223-1130 or Jsenney@pselaw.com if you get audited or need some assistance dealing with a tax matter.

 AND ONE MORE THING.  Don’t forget, the American Tax Relief Act made several changes to the tax code that are short lived.  You need to act fast to take advantage of them. For example, the asset holding period for built-in-gains tax purposes is reduced from 10 years to 5 years for assets sold in 2012 or 2013.  Likewise, the small business stock gain exclusion is increased to 100% from 75% for stock acquired in 2012 or 2013.  If you would like to know more about the provisions of the American Tax Relief Act, contact me at 937-223-1130 or Jsenney@pselaw.com.

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.