Year-End Tax Planning for IndividualsPosted on November 20th, 2013
As the year draws to a close, it is a good time to take stock of your tax situation and identify possible opportunities to minimize your tax liability. Many of the provisions associated with the American Taxpayer Relief Act of 2012 (ATRA) became effective in 2013, which means they will have an impact on this year’s tax return.
The ATRA extended numerous benefits for middle-income taxpayers that can help minimize your tax bite if you qualify. Tax benefits include many credits and benefits for families, some deductions for state and local taxes and tax credits for making energy-saving improvements to your home. If you are a higher income taxpayer, the ATRA increased your need to plan to lower the impact of higher rates.
We encourage you to contact us at your earliest convenience to discuss how these laws affect your tax situation and develop a strategy that makes sense for you. Among the issues you should be considering:
Health Care Reform
The Affordable Care Act (ACA) has generated a great deal of confusion and concern. Although no tax considerations for individuals are involved, taxpayers who don’t have health care coverage may be subject to a penalty.
Even if you already have coverage, you may want to consider alternatives available in the newly created Health Insurance Marketplace. We can help you assess what reform means to you and offer the advice you need to make the best choices.
New Tax Laws in Effect
- High-income individuals will likely pay more in taxes under the new law and should consider options for minimizing their burden. The highest individual income tax rate rose to 39.6% in 2013 and taxpayers at this income level also saw the dividend and long-term capital gains tax rates rise from 15% to 20%.
- In addition, the new 3.8% net investment income tax applies to single taxpayers with adjusted gross income of $200,000 and joint filers earning $250,000. This new tax may affect the effective after-tax return on the sale of your investments, but proper planning may serve to minimize the impact.
- Although the alternative minimum tax (AMT) originally was aimed at high-income taxpayers, it increasingly has affected more and more middle-income taxpayers over the years. The law indexed the AMT for inflation but the use of certain tax breaks could still subject you to the tax.
- Phase-outs of personal exemptions and the limitation on itemized deductions have been reinstated. As a result, joint filers with adjusted gross income greater than $300,000 and single taxpayers whose adjusted gross income exceeds $250,000 may see a decrease in both of these deductions.
- After several years of uncertainty in the estate tax area, the ATRA finally created some permanency. The amount that an heir can inherit without owing estate tax is now set at $5 million and will be indexed for inflation in future years. In addition, the estate tax was raised to 40%. Under the ATRA, taxpayers age 70½ and older can once again make up to $100,000 of tax-free distributions from an IRA directly to qualified charities.
For those who are paying college tuition, there is some good news. Several education-related benefits were extended by the ATRA, including the American Opportunity Tax Credit, which allows eligible taxpayers to claim a tax credit for some higher education expenses. Given skyrocketing tuition costs, families should not overlook these credits and deductions as they plan for college.
We can help you understand your tax situation and determine the best steps to address your tax challenges and any other financial concerns. We are also available after tax season to advise you on the financial strategies and planning decisions that will help you meet your goals. Please don’t hesitate to contact us today to schedule an appointment to begin discussing your options.
2013 Third Quarter Federal Tax DevelopmentsPosted on October 22nd, 2013
On October 1, IRS offices across the country emptied as most of the agency’s employees were furloughed following a lapse in appropriations. Nearly 90 percent of the IRS’s 90,000 employees were furloughed on October 1 after Congress failed to pass legislation to keep the IRS and other federal agencies operating after the end of the government’s fiscal year (FY) 2013. The IRS explained that some functions would continue during the government shutdown, including the processing of tax payments, criminal investigations and some litigation. The IRS reminded taxpayers that the underlying tax law remains in effect, as do their tax obligations during the shutdown.
In July, the White House announced a one-year delay in the employer shared responsibility payment and employer/insurer reporting under the Patient Protection and Affordable Care Act (Affordable Care Act). The Affordable Care Act generally requires applicable large employers to pay an assessable payment if, among other circumstances, the employer fails to offer full-time employers and their dependents the opportunity to enroll in minimum essential coverage. The Affordable Care Act also requires large employers and many insurers to file annual returns reporting minimum essential coverage. After the White House’s announcement, the IRS issued transition relief and proposed regulations. The IRS reported that it is exploring simplification of employer/insurer reporting.
The IRS issued final regulations on the Affordable Care Act’s individual shared responsibility requirements in August. The individual mandate generally requires individuals to carry minimum essential health coverage after 2013 unless they qualify for an exemption. An individual who does not carry minimum essential coverage and does not qualify for an exception must pay a penalty.
In September, the IRS issued long-awaited final regulations on the treatment of costs to acquire, produce or improve tangible property. The final regulations impact any industry that uses tangible property, real or personal, the IRS explained. In the final regulations, the IRS added many taxpayer-friendly provisions, including a revised de minimis safe harbor, a routine maintenance safe harbor for buildings and new safe harbors for small taxpayers. Taxpayers will apply the final regulations to determine whether they can deduct costs as repairs or if they must capitalize the costs and recover them over a period of years.
Same-sex marriage/domestic partners
Following the U.S. Supreme Court’s decision to strike down Section 3 of the Defense of Marriage Act (DOMA) ( E.S. Windsor, June 28, 2013), the IRS issued guidance for taxpayers and tax professionals in August. The IRS announced a general rule recognizing same-sex marriage nationwide. Same-sex married couples are treated as married for all federal tax purposes, including income and estate taxes, the IRS explained.
However, the IRS’s treatment of married same-sex couples does not extend to domestic partners. The IRS explained that domestic partners are not considered married for federal tax purposes because they are not married under state law.
Net investment income tax
The Affordable Care Act imposes a 3.8 percent surtax on qualified net investment income under new Code Sec. 1411, generally effective for tax years beginning after December 31, 2012. In August, the IRS released a draft version of Form 8960, Net Investment Income Tax. The IRS is expected to finalize Form 8960 before the start of the 2014 filing season. The IRS is also expected to issue final regulations about the net investment income surtax before year-end to clarify many questions about the scope of the surtax.
The leaders of the House and Senate tax writing committee launched a nationwide tax reform tour during the summer of 2013. Rep. Dave Camp, R-Mich. and Sen. Max Baucus, D-Mont., visited several cities to promote comprehensive tax reform. At the same time, President Obama proposed to eliminate some business tax preferences in exchange for a reduction in the corporate tax rate. President Obama also proposed to tax carried interest as ordinary income.
After 2013, many popular but temporary tax incentives (known as extenders) are scheduled to expire. They include the state and local sales tax deduction, the teacher’s classroom expense deduction, the research tax credit, transit benefits parity, and many more. Some lawmakers in Congress have proposed to include the extenders in year-end comprehensive tax reform legislation, but leaders in the House and Senate have been cool to this idea. More likely, these incentives will be extended for one or two years in a year-end stand-alone bill or linked to other legislation. Our office will keep you posted of developments on the fate of these valuable tax incentives.
In August, the IRS announced exclusive simplified methods for taxpayers to request late S corporation elections. The IRS consolidated and expanded earlier guidance for taxpayers requesting late S corporation elections, late Electing Small Business Trust elections, late Qualified Subchapter S Trust Elections, Qualified Subchapter S Subsidiary elections, and certain late corporate classification elections.
Small employer health insurance tax credit
Qualified small employers may be eligible for the Code Sec. 45R tax credit that is designed to help offset the cost of providing health insurance to their employees. In August, the IRS issued proposed reliance regulations on the credit. In tax years beginning after 2013, a qualified small employer must participate in the Small Business Health Options Program (SHOP) to take advantage of the credit. In September, the White House announced a delay in the start of SHOP.
Per diem rates
The IRS announced in September that the simplified per diem rates that taxpayers can use to reimburse employees for expenses incurred during travel after September 30, 2013. The high-cost area per diem increases from $242 to $251 and the low-cost area increases from $163 to $170. In 2012, the IRS did not increase the per diem rates, reflecting a directive from the White House to federal agencies to curb rising travel costs.
The IRS updated its equitable innocent spouse relief procedures in September. The IRS explained that the updated procedures are intended to give greater deference to the presence of abuse in a relationship. Some of the factors that the IRS uses to weigh a request for equitable innocent spouse relief were also made more taxpayer-friendly.
The Tax Court held in August that it lacks jurisdiction to review an IRS determination of worker status. The case arose from a request for the IRS to determine a worker’s status. The Tax Court found there was no audit or examination as the IRS was simply responding to the taxpayer’s request.
Collection due process cases
Taxpayers subject to IRS levy are generally entitled to a pre-levy hearing (a collection due process (CDP) hearing or an equivalent hearing). The Treasury Inspector General for Tax Administration (TIGTA) reported in September that it had discovered some concerns about the handling of CDP cases by the IRS. TIGTA discovered delays in the initial processing of requests for CDP hearings.
In a case of first impression, the Tax Court applied the substance-over-form doctrine and found that an insurance company’s lease-in, lease-out (LILO) and sale-in, sale-out (SILO) transactions were not leases ( John Hancock Life Insurance Co. (USA), 141 TC No. 1). The Tax Court held that the taxpayer could not deduct depreciation, rental expenses, interest expenses, and transactional costs connected with the transactions.
Domestic production activities deduction
Code Sec. 199 provides a deduction for qualified domestic production activities. In August, the IRS determined that a taxpayer could claim the Code Sec. 199 deduction for in-store photo production activities. However, the taxpayer could not claim the deduction where it only transferred a customer’s photos onto DVDs because those activities were a service and not the manufacturing of a product.
President Obama has proposed John Koskinen to serve as the next Commissioner of Internal Revenue. If confirmed by the Senate, Koskinen would replace IRS Principal Deputy Commissioner Daniel Werfel. Koskinen previously served in leadership roles with the Federal Home Loan Mortgage Corporation (Fannie Mae).
If you have any questions about these or other federal tax developments that may impact you or your business, please contact our office.
Notice of Health Insurance ExchangesPosted on September 12th, 2013
As you may know, the health care law – the Patient Protection and Affordable Care Act (PPACA) – requires most individuals (including children and other dependents) to carry health insurance, beginning January 1, 2014. The law also requires the establishment of a health insurance exchange in all states by October 1, 2013. The goal is that exchanges, working with private insurers, will act as a marketplace and provide “one-stop shopping” for individuals and families who may need health insurance or who seek less expensive coverage. A companion program – the Small Business Health Options Program or SHOP Exchange – will assist small businesses that want to offer insurance to their employees.
PPACA amended the Fair Labor Standards Act (FLSA) to require that employers provide each employee with notice about the exchanges. The notice requirement applies to employers that employ one or more employees who are engaged in, or produce goods for, interstate commerce. An employer must have at least $500,000 in business annually. The notice requirement also applies to hospitals, schools, and government agencies.
Employers must provide notice to their existing employees by October 1, 2013, and must provide notice to new employees hired on or after October 1, 2013. Each employee must receive notice, regardless of the employee’s health plan enrollment status and part- or full-time employment status. Notice may be provided in writing or electronically under the Department of Labor’s electronic disclosure rules.
The notice must inform the employee:
- Of the existence of the exchange, the services provided by the exchange, and contact information for the exchange.
- That he or she may be eligible for a premium tax credit under the Internal Revenue Code if (a) the employer pays less than 60 percent of the cost of health insurance offered by the employee; and (b) the employee purchases health insurance through the exchange.
- That an employee who purchases health insurance through an exchange may lose the employer’s (tax-free) contribution to the cost of health insurance offered by the employer.
To satisfy this notice requirement, the Department of Labor has provided model notices on its website, at http://www.dol.gov/ebsa/healthreform/. The website provides one model for employers who offer a health plan to some or all of their employees, and another model for employers who do not offer a health plan. Employers may modify the notice, as long as it meets the content requirements described above.
If you have questions about this requirement or want help to comply with the requirement, please contact our office.
Tax Challenges With U.S.-Based Private Equity Fund FormationPosted on August 8th, 2013
I am pleased to announce that I will be speaking in an upcoming Strafford live phone/web seminar, “Tax Challenges With U.S.-Based Private Equity Fund Formation” scheduled for Thursday, August 15, 1:00pm-2:50pm EDT.
The normal “flow-through” structures used by private equity funds can create U.S. tax problems for tax-exempt and non-U.S. limited partners of the private equity funds.
The American Tax Relief Act of 2012 has a significant impact on private equity deals, both in terms of investment strategy and compensation policy. Investors and fund managers must adjust their internal rate of return calculations to take into account the higher tax rates.
Our experienced panel of veteran tax advisors will identify opportunities to minimize your client’s federal and state taxes when investing in private equity funds that include other differently situated investors with competing tax objectives.
Our panel will provide tax advisors with a summary of basic fund prototypes, a comprehensive review of the principal U.S. tax objectives of the general partner and the fund manager, and explain the various categories of investors in a typical fund and location of fund.
We will offer our perspectives and guidance on these and other critical issues:
- The impact of the American Tax Relief Act of 2012
- How the new 3.8% Medicare tax can be minimized.
- Structures for U.S. investors investing in U.S. and non-U.S. based funds.
- Alternative approaches to both common and unique tax scenarios for tax professionals who regularly advise private equity funds and their investors.
After our presentations, we will engage in a live question and answer session with participants so we can answer your questions about these important issues directly.
I hope you’ll join us.
Or call 1-800-926-7926 ext. 10
Ask for Tax Challenges in Private Equity Fund Formation on 8/15/2013
Joshua V. Azran CPA/ABV/CFF, CMA, CGMA, CFE
Post Tax Season Update & 2013 First Quarter Federal Tax DevelopmentsPosted on April 25th, 2013
April 15 has come and gone but it’s not time to stop thinking about taxes and strategic tax planning opportunities. Since the start of 2013, there have been many new federal tax developments, which will impact tax planning for this year and beyond. As 2013 unfolds, many changes made to the Tax Code by the American Taxpayer Relief Act of 2012 (ATRA) take effect. Additionally, there are new taxes to take into account because of the health care reform package, along with enhancements to many tax credits and deductions. Now is a good time to revisit these developments and explore how they will affect your strategic tax plans. Planning today can help maximize your tax savings going forward. As always, please give our office a call or email if you have any questions.
Tax planning and ATRA
Returns just filed (or that will be filed under extension by October 15, 2013) reflect the tax laws as they existed in 2012 (with some expired provisions renewed retroactively for 2012 by ATRA). Looking ahead, your 2013 return to be filed in 2014 will reflect the many changes to the Tax Code made by ATRA. Because the new law was passed at the beginning of the year, it was overshadowed by the filing season. However, its provisions impact every taxpayer and it’s vital to take time to gauge how they will affect you. The list of changes made by ATRA is long: many generous tax incentives, such as the $1,000 child tax credit, enhanced adoption credit, and enhanced earned income credit, are made permanent. ATRA also permanently “patches” the alternative minimum tax (AMT), which definitely will impact planning for taxpayers liable for the AMT. The new law also extends permanently the Bush-era tax rate cuts for individuals except taxpayers with taxable income above $400,000 ($450,000 for married couples filing a joint return). Income above these levels is taxed at 39.6 percent effective January 1, 2013. ATRA also increased the tax rates on qualified capital gains and dividends for higher income taxpayers. All these changes and more are set in motion by ATRA.January 10, 2013.
New proposals to consider
Looking ahead, some new proposals could impact tax planning in 2013 and beyond. President Obama has proposed to reduce the value to 28 percent of certain deductions and exclusions that would otherwise reduce taxable income in the 33, 35 or 39.6 percent tax brackets. The President also re-proposed the so-called Buffett Rule, now referred to as the “Fair Share Tax” for taxpayers with incomes above $1 million (with full phase-in above $2 million). Moreover, the President has proposed to limit contributions and accruals on tax-favored retirement benefits, including IRAs, qualified plans, tax-sheltered annuities, and deferred compensation plans. The limit generally would apply when a taxpayer accumulates total retirement amounts that exceed the amount necessary to provide the maximum annuity permitted for a defined benefit plan. The President’s proposals are expected to be debated in Congress as lawmakers and the White House try to reach an agreement on tax reform and deficit deduction. President Obama has said he wants an agreement before August, which could significantly change your tax planning for 2013 and beyond. Our office will keep you posted of developments.
NII surtax takes effect
The 3.8 percent Medicare surtax on net investment income (NII) became effective January 1, 2013. The NII surtax on individuals equals 3.8 percent of the lesser of: Net investment income for the tax year, or the excess, if any of the individual’s modified adjusted gross income (MAGI) for the tax year, over the threshold amount. The threshold amount in turn is equal to $250,000 in the case of a taxpayer making a joint return or a surviving spouse, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case.
The IRS issued proposed regulations in 2012 intending them to be “reliance regulations.” Nonetheless, taxpayers continue to be confused over certain sections. Although final regulations are promised “within 2013″ so they would be available for the 2013 tax year and 2014 filing season, current misinterpretation of the proposed regulations can impact on tax strategies now being put into motion in 2013. Any misinterpretation can also bear on 2013 estimated tax that may be due to cover any 3.8 percent NII surtax liability. Our office will keep you posted of developments.
Vehicle depreciation limits increase for 2013
Tax planning for 2013 is helped by the IRS’s release of inflation-adjusted limitations on depreciation deductions for business-use of passenger automobiles, light trucks, and vans first placed in service during calendar year 2013. Some of the depreciation limits are identical to the limits for 2012; other ceilings have increased by $100. The 2013 dollar limits reflect the inflation adjustments both with the extension of bonus depreciation by ATRA and without. If bonus depreciation is allowed to lapse after 2013, as President Obama has proposed, the dollar limits for 2014 would be lower but would still be adjusted for inflation. The maximum depreciation limits under Code Sec. 280F for passenger automobiles first placed in service during the 2013 calendar year are: $11,160 for the first tax year ($3,160 if bonus depreciation does not apply); $5,100 for the second tax year; $3,050 for the third tax year; and $1,875 for each succeeding tax year. The maximum depreciation limits under Code Sec. 280F for trucks and vans first placed in service during the 2013 calendar year are slightly higher. Keep in mind that SUVs and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds continue to be exempt from the luxury vehicle depreciation caps based on a loophole in the operative definition.
IRS audits of business property write-offs on “stand-down”
The IRS announced in March that it had updated its 2012 directive that generally instructs employees to discontinue audits of costs to maintain, replace or improve tangible property. The updated directive tells employees not to begin examining those issues for tax years beginning on or after January 1, 2012 and before January 1, 2014. The directive retains the “stand-down” of audit activity in this area beginning in 2012. The IRS also advised that it intends to make changes to temporary regulations regarding certain de minimis rules, routine maintenance and more.
Prepare for employer and individual mandates under PPACA
The IRS issued long-awaited proposed reliance regulations on the employer mandate under the Patient Protection and Affordable Care Act (PPACA). An applicable large employer is an employer that employed an average of at least 50 full-time employees during the preceding calendar year, including full-time equivalent (FTE) employees. The statute defines a full-time employee as an employee who on average was employed for at least 30 hours of service per week.
The PPACA also generally requires individuals, unless exempt, to carry minimum essential health insurance coverage after 2013 or make a shared responsibility payment. The IRS has issued proposed regulations on the individual mandate. The proposed regulations, the IRS explained, are intended to mitigate the affordability test for related individuals.
IRS ramps up oversight of foreign accounts
The Foreign Account Tax Compliance Act (FATCA) gives the agency new tools to discover tax evasion. In January, Treasury and the IRS issued final regulations under FATCA that describe the requirements for foreign financial institutions (FFIs), nonfinancial foreign entities (NFFEs), and other taxpayers to comply with FATCA’s reporting and withholding regimes on U.S. and foreign account holders. The 544-page regulation package seeks to harmonize the United States’ regulatory requirements with the use of intergovernmental agreements (IGAs) to implement FATCA.
Simplified safe harbor for claiming home office deduction
The home office deduction is one of the most complex in the Tax Code. In response, the IRS announced a simplified safe harbor method for claiming the home office deduction for tax years beginning on or after January 1, 2013. Under the safe harbor, taxpayers determine the amount of deductible expenses for qualified business use of the home for the tax year by multiplying the allowable square footage by the prescribed rate. The allowable square footage cannot exceed 300 square feet and the prescribed rate is $5.00, which provides a maximum deduction under the safe harbor of $1,500. The IRS indicated it may revisit the prescribed rate amount in the future.
To conclude “Since the start of 2013, there have been many new federal tax developments, which will impact tax planning for this year and beyond.”
If you have any questions about these or any other federal tax developments and their impact on tax planning, please contact our office at (310) 691-5040 or (818) 691-1234 or via e-mail at firstname.lastname@example.org.
Updated FAQ on Small Business Health Care CreditPosted on March 19th, 2013
If you are a small employer with fewer than 25 full-time equivalent employees, pay an average wage of less than $50,000 a year, and pay at least half of your employee health insurance premiums then you may be eligible for the Small Business Health Care Tax Credit.
For tax years 2010 through 2013, the maximum credit is 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities. An enhanced version of the credit will be effective beginning Jan. 1, 2014. The IRS is expected to issue additional information about the enhanced version as it becomes available. In general, on Jan. 1, 2014, the rate will increase to 50 percent and 35 percent, respectively.
Here’s what this means for you. If you pay $50,000 a year toward workers’ health care premiums – and if you qualify for a 15 percent credit, you save $7,500. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $12,000 a year.
Even if you are a small business employer who does not owe tax for the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.
There is good news for small tax-exempt employers too. The credit is refundable, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability.
This credit was provided by the Patient Protection and Affordable Care (PPAC) Act as part of a design to reform the United States health care system and encourage employer’s shared responsibility. If you have any questions regarding this credit or any other provision of PPAC Act, please call our office at (310) 691-5040 or (818) 691-1234 or e-mail us at email@example.com.
Accounting 101 for Small Business StartupsPosted on March 10th, 2013
What does your business start-up need to know about accounting? Well, here’s where to start:
- What is your business structure? Choose the best ownership structure for the short term, but do not forget to consider the long term. Maybe an LLC is appropriate for now, and a C-Corporation later.
- Where do we form our entity? Do we choose Delaware or Nevada or California? Do we need to register in more than one state?
- Are you going to keep your books on a cash-basis, accrual-basis, income-tax-basis, or use some other method? Do your books need to comply with GAAP?
- Filing deadlines are different for start-up businesses than for individuals. We all know the April deadline for personal tax returns, but corporate and business returns are due in March and filing late or missing a deadline could trigger interest and penalties.
- You will need an EIN (employer identification number) to file your taxes.
- Though not accounting per se, startups need insurance. Whatever risks are associated with your business, you need to get the proper business insurance.
- Choose your accounting software. We recommend consulting your CPA to determine the best package to fit your needs.
- There is no reason to wait to hire your accountant. Quite the contrary, waiting can lead to missed opportunities and inefficiencies that could have been otherwise avoided. A credentialed accounting professional will be able to assist you in all aspects of your start-up business.
Maximizing Deductions for Business-Use VehiclesPosted on January 26th, 2013
How would you like to squeeze more time out of your busy week, cut down on record-keeping duties, and reduce piles of paperwork and old receipts? The optional standard mileage rates for business vehicles can help you do just that. Businesses that operate up to four vehicles at the same time can deduct this standard mileage rate rather than keeping track of depreciation, gas, and repairs.
The business standard mileage rate for 2013 is 56.5 cents-per-mile. The business rate reflects, among other things, gasoline, depreciation and maintenance costs each year. The business standard mileage rate for 2012 has been 55.5 cents-per-mile (the same as for the second half of 2011 and up from 51 cents-per-mile for the first half of 2011).
Four or more vehicles
Businesses using no more than four vehicles for business purposes can use the business standard mileage rate. Generally, the IRS prohibits taxpayers from using the business standard mileage rate to compute the deductible expenses of five or more vehicles the taxpayer owns or leases and uses simultaneously, such as in a fleet operation.
The depreciation component of the business standard mileage rate is 23 cents-per-mile for 2013, the same as for 2012. In 2011 the rate was 22 cents-per-mile. Businesses that use the standard mileage rate are not allowed to take actual depreciation deduction amounts, even if they are higher than the depreciation component. Before deciding to use the standard mileage rate, a look at whether you will do better under the actual expense method, which includes actual depreciation, should be considered. Especially for circumstances in which Code Section 179 expensing and/or bonus depreciation is available; taking actual expenses, including actual depreciation, may be worth the effort.
Luxury vehicle caps. If actual depreciation is taken on a business vehicle, Congress wanted to be sure that vehicles selling above a certain price point did not enable their owners to take a larger write-off because of that premium cost. The “luxury vehicle” limits are designed to do just that, although taxpayers may debate the price points above which Congress set the “luxury” level. For example, using the standard mileage rate to value an employee’s personal use of a business vehicle is not allowed if the vehicle is valued at more than $15,900 for 2012 (projected to rise to $16,000 in 2013); Light trucks or vans are governed by a slightly higher level of $16,700 for 2012 (and $17,000 for 2013). This value also translates into the cap allowed on depreciation taken each year on the vehicle. For example, the maximum depreciation deduction for passenger automobiles first placed in service by the taxpayer in the 2012 calendar year is $3,160 for the first year (in addition to $8,000 for bonus depreciation, if applicable). For light trucks and vans, the first year cap is slightly higher: $3,360 (but with the same additional $8,000 deduction for bonus depreciation).
Special rules for heavy SUVs. For many years, SUV owners enjoyed a special tax break, often referred to as the “SUV loophole.” As explained, the “luxury car” rules place strict limits on the maximum amount of depreciation that may be claimed on passenger automobiles, including trucks and vans, during each year of a vehicle’s recovery (depreciation) period. Generally, however, the luxury vehicle limits only apply to vehicles primarily used on public streets with an unloaded gross weight of 6,000 pounds or less. A truck or van, including an SUV built on a truck chassis, is not subject to the annual vehicle depreciation limitations if its gross vehicle weight rating (maximum loaded weight) is in excess of 6,000 pounds. This “loophole” treatment had allowed many taxpayers who purchased an SUV with a gross weight in excess of 6,000 pounds to write off the entire cost in the year of purchase under the Code Sec. 179 expensing deduction.
Congress started to crack down on the so-called “SUV loophole” when, in the American Jobs Creation Act of 2004, it put the brakes on the cost of any SUV that may be expensed under Code Sec. 179 to $25,000, in addition to being counted toward the total caps on deductions for Code Sec. 179 property of all types. For example, a $139,000/$560,000 overall Section 179 expensing limits apply for 2012 (this is scheduled to drop to $25,000 for 2013, with a $200,000 investment ceiling, unless Congress takes further action). If the SUV is not built on a truck chassis or if it does not have a gross vehicle weight of more than 6,000 pounds, however, the “luxury vehicle” limit puts an even lower cap on those deductions. Nevertheless, heavy SUVs continue to benefit from a “bonus depreciation” loophole in the law in which a deduction for bonus depreciation is not capped for those vehicles not falling under the luxury-vehicle depreciation caps (that is, heavy SUVs). Although bonus depreciation applies to 2012, Congress may not extend it into 2013, or it may do so but without retaining what some have termed an unintended benefit for heavy SUV owners.
Bonus depreciation. Bonus depreciation for 2012 may be added to the available first-year deductions allowed on the purchase of a vehicle used for business if certain criteria are met. For most vehicles (those that are not fully depreciated in their first-year after applying the cap), business taxpayers claiming 50 percent bonus depreciation in 2012 are allowed an additional $8,000 in first year depreciation over and above the $3,160 first-year limit, for a total of $11,160 in the first tax year. Bonus depreciation, however, is for new vehicles only, and only if placed in service within the tax year. The section 179 expensing deduction, on the other hand, is available for both used and new vehicles.
Personal and business use
If you use your business vehicle for personal trips (including commuting back and forth from home and your principle business location) you must pro-rate your deduction to exclude the percentage of personal use. The magic number here is 50 percent. As long as you use your vehicle more than 50 percent for business during the year, you can pro-rate your deduction. You also have the option of using the standard mileage rate, based on miles of business use for the year times the prescribed rate.
Meet YEC’s Rahim Fazal of Involver on #StartupLabPosted on January 7th, 2013
Rahim Fazal, this week’s live chat host (click here to RSVP), still remembers the exact moment he knew he would be a lifelong entrepreneur. It was June 14th, 2000. Rahim was in his senior year at high school, and he’d just sold his first venture, a Web hosting company, for a sweet $1.5 million.
“Up to that moment, everyone around me, my parents, my family, my teachers, my counselors, etc. was telling me what to do with my life,” he told a startup conference audience in Canada earlier this year.
Not anymore, clearly.
The co-founder of Involver, the world’s largest social media marketing platform (just acquired by Oracle), has never looked back. In fact, he went on to become one of the youngest directors of a publicly traded company in the history of the U.S. and the youngest student ever accepted into Canada’s top MBA program at the Richard Ivey School of Business.
To boot, the White House just honored Rahim with an Empact 100 Award too, and he’s been named as one of the Top 25 Digital Thought Leaders by iMedia. And today, Involver is used by more than 1 million companies, including a number of Fortune 500s.
So what’s his secret sauce? How did Rahim get so far, so fast?
Aside from being nice and not listening to detractors, he says it’s all about throwing away your pride and asking for help when you need it.
That “aha moment” came to Rahim when he started falling behind at university. “Running out of options and excuses, I admitted I just didn’t get the material,” he remembers. For the first time in his life, he had to ask for help. “With a little bit of luck, and A LOT of help, I graduated with an A-average.”
And look how far he’s come!
This Thursday, January 10th at 3 PM EST, why not come get a bit zen with a real business Buddha?
Learn how it could just be your pride holding you back. Rahim Fazal will unblock your shareholder chakra and lead you down the path to ultimate entrepreneurial enlightenment … no yoga mats required!
Join our hour-long #StartupLab live chat presented by Citi, and learn firsthand how to let go — and go higher.
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Overview of the 2012 American Taxpayer Relief Act / Fiscal Cliff LegislationPosted on January 4th, 2013
After weeks, indeed months of proposals and counter-proposals, seemingly endless negotiations and down-to-the-wire drama, Congress has passed legislation to avert the tax side of the so-called “fiscal cliff.” The American Taxpayer Relief Act permanently extends the Bush-era tax cuts for lower and moderate income taxpayers, permanently “patches” the alternative minimum tax (AMT), provides for a permanent 40 percent federal estate tax rate, renews many individual, business and energy tax extenders, and more. In one immediately noticeable effect, the American Taxpayer Relief Act does not extend the 2012 employee-side payroll tax holiday.
The American Taxpayer Relief Act is intended to bring some certainty to the Tax Code. At the same time, it sets stage for comprehensive tax reform, possibly in 2013. Moreover, it creates important planning opportunities for taxpayers, which we can discuss in detail.
Unlike the two-year extension of the Bush-era tax cuts enacted in 2010, the debate in 2012 took place in a very different political and economic climate. If Congress did nothing, tax rates were scheduled to increase for all taxpayers at all income levels after 2012. President Obama made it clear that he would veto any bill that extended the Bush-era tax cuts for higher income individuals. The President’s veto threat gained weight after his re-election. Both the White House and the GOP realized that going over the fiscal cliff would jeopardize the economic recovery, and the American Taxpayer Relief Act is, for the moment, their best compromise.
Tax rates. The American Taxpayer Relief Act extends permanently the Bush-era income tax rates for all taxpayers except for taxpayers with taxable income above certain thresholds:
$400,000 for single individuals, $450,000 for married couples filing joint returns, and $425,000 for heads of households. For 2013 and beyond, the federal income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent. In comparison, the top rate before 2013 was 35 percent. The IRS is expected to issue revised income tax withholding tables to reflect the 2013 rates as quickly as possible and provide guidance to employers and self-employed individuals.
Additionally, the new law revives the Pease limitation on itemized deductions and personal exemption phaseout (PEP) after 2012 for higher income individuals but at revised thresholds. The new thresholds for being subject to both the Pease limitation and PEP after 2012 are $300,000 for married couples and surviving spouses, $275,000 for heads of households, $250,000 for unmarried taxpayers; and $150,000 for married couples filing separate returns.
Capital gains. The taxpayer-friendly Bush-era capital gains and dividend tax rates are modified by the American Taxpayer Relief Act. Generally, the new law increases the top rate for qualified capital gains and dividends to 20 percent (the Bush-era top rate was 15 percent). The 20 percent rate will apply to the extent that a taxpayer’s income exceeds the $400,000/$425,000/$450,000 thresholds discussed above. The 15 percent Bush-era tax rate will continue to apply to all other taxpayers (in some cases zero percent for qualified taxpayers within the 15-percent-or-lower income tax bracket).
Payroll tax cut. The employee-side payroll tax holiday is not extended. Before 2013, the employee-share of OASDI taxes was reduced by two percentage points from 6.2 percent to 4.2 percent up the Social Security wage base (with a similar tax break for self-employed individuals). For 2013, two percent reduction is no longer available and the employee-share of OASDI taxes reverts to 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent. In 2012, the payroll tax holiday could save a taxpayer up to $2,202 (taxpayers earning at or above the Social Security wage base for 2012). As a result of the expiration of the payroll tax holiday, everyone who receives a paycheck or self-employment income will see an increase in taxes in 2013.
AMT. In recent years, Congress routinely “patched” the AMT to prevent its encroachment on middle income taxpayers. The American Taxpayer Relief Act patches permanently the AMT by giving taxpayers higher exemption amounts and other targeted relief. This relief is available beginning in 2012 and going forward. The permanent patch is expected to provide some certainty to planning for the AMT. No single factor automatically triggers AMT liability but some common factors are itemized deductions for state and local income taxes; itemized deductions for miscellaneous expenditures, itemized deductions on home equity loan interest (not including interest on a loan to build, buy or improve a residence); and changes in income from installment sales. Our office can help you gauge if you may be liable for the AMT in 2013 or future years.
Child tax credit and related incentives. The popular $1,000 child tax credit was scheduled to revert to $500 per qualifying child after 2012. Additional enhancements to the child tax credit also were scheduled to expire after 2012. The American Taxpayer Relief Act makes permanent the $1,000 child tax credit. Most of the Bush-era enhancements are also made permanent or extended. Along with the child tax credit, the new law makes permanent the enhanced adoption credit/and income exclusion; the enhanced child and dependent care credit and the Bush-era credit for employer-provided child care facilities and services.
Education incentives. A number of popular education tax incentives are extended or made permanent by the American Taxpayer Relief Act. The American Opportunity Tax Credit (an enhanced version of the Hope education credit) is extended through 2017. Enhancements to Coverdell education savings accounts, such as the $2,000 maximum contribution, are made permanent. The student loan interest deduction is made more attractive by the permanent suspension of its 60-month rules (which had been scheduled to return after 2012). The new law also extends permanently the exclusion from income and employment taxes of employer-provided education assistance up to $5,250 and the exclusion from income for certain military scholarship programs. Additionally, the above-the-line higher education tuition deduction is extended through 2013 as is the teachers’ classroom expense deduction.
Charitable giving. Congress has long used the tax laws to encourage charitable giving. The American Taxpayer Relief Act extends a popular charitable giving incentive through 2013: tax-free IRA distributions to charity by individuals age 70 ½ and older up to maximum of $100,000 for qualified taxpayer per year. A special transition rule allows individuals to recharacterize distributions made in January 2013 as made on December 31, 2012. The new law also extends for businesses the enhanced deduction for charitable contributions of food inventory.
Federal estate tax. Few issues have complicated family wealth planning in recent years as has the federal estate tax. Recent laws have changed the maximum estate tax rate multiple times. Most recently, the 2010 Taxpayer Relief Act set the maximum estate tax rate at 35 percent with an inflation-adjusted exclusion of $5 million for estates of decedents dying before 2013. Effective January 1, 2013, the maximum federal estate tax will rise to 40 percent, but will continue to apply an inflation-adjusted exclusion of $5 million. The new law also makes permanent portability between spouses and some Bush-era technical enhancements to the estate tax.
The business tax incentives in the new law, while not receiving as much press as the individual tax provisions, are valuable. Two very popular incentives, bonus depreciation and small business expensing, are extended as are many business tax “extenders.”
Bonus depreciation/small business expensing. The new law renews 50 percent bonus depreciation through 2013 (2014 in the case of certain longer period production property and transportation property). Code Sec. 179 small business expensing is also extended through 2013 with a generous $500,000 expensing allowance and a $2 million investment limit. Without the new law, the expensing allowance was scheduled to plummet to $25,000 with a $200,000 investment limit.
Small business stock. To encourage investment in small businesses, the tax laws in recent years have allowed noncorporate taxpayers to exclude a percentage of the gain realized from the sale or exchange of small business stock held for more than five years. The American Taxpayer Relief Act extends the 100 percent exclusion from the sale or exchange of small business stock through 2013.
Tax extenders. A host of business tax incentives are extended through 2013. These include:
- Research tax credit or R&D credit
- Work Opportunity Tax Credit (WOTC)
- New Markets Tax Credit
- Employer wage credit for military reservists
- Tax incentives for empowerment zones
- Indian employment credit
- Railroad track maintenance credit
- Subpart F exceptions for active financing income
- Look through rules for related controlled foreign corporation payments
For individuals and businesses, the new law extends some energy tax incentives. The Code Sec. 25C, which rewards homeowners who make energy efficient improvements, with a tax credit is extended through 2013. Businesses benefit from the extension of the Code Sec. 45 production tax credit for wind energy, credits for biofuels, credits for energy-efficient appliances, and many more.
The negotiations and passage of the new law are likely a dress rehearsal for comprehensive tax reform during President Obama’s second term. Both the President and the GOP have called for making the Tax Code more simple and fair for individuals and businesses. The many proposals for tax reform include consolidation of the current individual income tax brackets, repeal of the AMT, moving the U.S. from a worldwide to territorial system of taxation, and a reduction in the corporate tax rate. Congress and the Obama administration also must tackle sequestration, which the American Taxpayer Relief Act delayed for two months. All this and more is expected to keep federal tax policy in the news in 2013. Our office will keep you posted of developments.
If you have any questions about the American Taxpayer Relief Act, please contact Azran Financial at (310) 691-5040 or (818) 691-1234 or via e-mail at firstname.lastname@example.org. We can schedule an appointment to discuss how the changes in the new law may be able to maximize your tax savings.