Let s Talk Taxes. Jim Forbes, CPA. February 12, 2013

Transcription

1 Let s Talk Taxes Jim Forbes, CPA February 12, 2013

2 The income tax had made more liars out of the American people than golf. Will Rogers AGENDA The hardest thing in the world to understand is the income tax. Albert Einstein Taxes: Of life s two certainties, the only one you can get an automatic extension. - Anonymous

3 2012 Planning 2013 Business tax changes 2013 Personal tax changes IRS Audits AGENDA

4 OVERVIEW Senate vote 89-8, House Signed into law on January 2, 2013 Retains Bush Tax Cuts for all but higher income taxpayers Increased tax on qualified dividend and capital gains for most taxpayers Many extensions for expiring provision Delay in sequestration

5 2012 PLANNING Bonus Depreciation - Qualifying property Tangible personal property Recovery period of 20 years or less No buildings Must be new Placed in service before 01/01/14

6 2012 PLANNING Planning Considerations Can elect out of bonus Expiring NOLs Basis limitations Future tax rate will be higher Can take Section 179 instead of bonus Can use bonus depreciation to create or increase loss Many States do not allow bonus depreciation

7 2012 PLANNING Section 179 Allows for 100% write-off of qualifying property Dollar limit Was $139,000 for 2012, $25,000 for 2013 Increased to $500,000 retroactively for 2012 and for 2013 Phase out Was $560K for 2012, $200K for 2013 Increased to $2M retroactively for 2012 and 2013

8 2012 PLANNING Section Planning Considerations Used property is eligible Cannot create a tax loss Many States do not allow the increased Section 179 Current tax rate vs. future tax rate

9 2012 PLANNING Research Tax Credit Extended 10 times since 1980 Expired December 31, 2011 Extended through December 31, 2013 President wants to make this permanent

10 2012 PLANNING Alternative Simplified Credit The excess dollar amount over the credit base by 14% Credit base = average R&D costs over the prior three years multiplied by 50% Qualifying Activities Technological in nature and new or improved process or product Process of experimentation Discovery test eliminated

11 2012 PLANNING Research Tax Credit Extended on January 2, 2013 Cannot record financial statement benefit under ASC 740 (formerly FAS 109) Consider making IRC 280C election and claiming $1 in credits

12 2012 PLANNING Why make the 280C election? Assume $1M taxable income $100K R&D Credit W/ 280C W/O 280C Taxable Income (before R&D) 1,000,000 1,000,000 Addback: R&D Expenses - 100,000 Taxable Income 1,000,000 1,100,000 Federal tax due (at 35%) 350, ,000 R&D Credit 65, ,000 Federal Tax Due 285, ,000

13 2012 PLANNING Accounting Method Changes Cost Segregation Building owners can segregate costs of building into shorter life assets instead of 39-year property Automatic method change that can be filed with 2012 tax return (3/15/13 or 9/15/13) Requires an engineering study Buildings with a cost of more than $500K

14 2012 PLANNING Accounting Method Changes 12-month rule Accrual method taxpayers Deduct prepaid expenses such as insurance and software maintenance. Automatic method change that can be filed with 2012 tax return (3/15/13 or 9/15/13)

15 2012 PLANNING Accounting Method Changes Deduct vacation paid within 2 ½ months Accrual method taxpayers Allows deduction for vested vacation pay that is paid by 3/15/13 Automatic method change that can be filed with 2012 tax return (3/15/13 or 9/15/13)

16 2012 PLANNING Deducting accrued bonus Accrual method taxpayers If employment is required at time of payment, the bonus cannot be deducted until fixed and determinable. (See CCA ) Consider setting up a bonus pool for all employees. No accounting method change required if it is a change in facts and not a change in method. IRS audit issue

17 2012 PLANNING Refund Opportunities Quick refund claim C Corporations Overpaid 2012 estimates can be refunded immediately Filed after year-end and before original due date Generally between 1/1/13 and 3/15/13 for calendar year taxpayers

18 2012 PLANNING Refund Opportunities C Corporation use of superseding return In the following order: File 7004 Preliminary Form 1120 with data sufficient to be considered a valid return File 1139 (processed within 90 days) File a superseding Form 1120 prior to the extended due date.

19 2013 BUSINESS Bonus Depreciation Expired 12/31/12 Extended to 12/31/13 50% first-year deduction

20 2013 BUSINESS The Q s Qualified Leasehold Improvement (QLI) Qualified Restaurant Property (QRP) Qualified Retail Property (QRI) 15-year straight line depreciation Extended through December 31, 2013

21 2013 BUSINESS Qualified Leasehold Improvements (QLI) Improvements to interior portion of building Nonresidential property Pursuant to a lease by either lessee or lessor More than three years after building first placed in service Excludes enlargement of a building, elevator, escalator, or building framework and related parties

22 2013 BUSINESS Qualified Restaurant Property (QRP) Includes buildings More than 50% of building s square footage is devoted to the preparation and on premises consumption of prepared meals. Free standing restaurants

23 2013 BUSINESS Qualified Retail Improvement (QRI) Same as QLI except: Can be related parties Open to the general public and is used in the retail trade or business of selling tangible personal property to the general public.

24 2013 BUSINESS Section 179 increased Research Tax Credit extended

25 2013 PERSONAL Highlights Bush tax cuts retained for most Raises top rate for dividends and capital gains Expiration of payroll tax holiday Permanently patches AMT Return of phase outs

26 2013 PERSONAL

27 2013 PERSONAL

28 2013 PERSONAL Payroll tax holiday Started January 1, 2011 Employee FICA rate reduced from 6.2% to 4.2% Extended for 2012 Expired as of January 1, 2013

29 2013 PERSONAL Alternative Minimum Tax (AMT) Relief Permanent patch Increased exemption for 2012 $50,600 Single, $78,750 MFJ Without fix - $33,750 Single, $45,000 MFJ Indexed for inflation

30 2013 PERSONAL Future of AMT Could be abolished in the future Obama proposed to replace part of the AMT with the so-called Buffet Rule Buffet Rule would ensure taxpayer making over $1 million would pay an effective rate of at least 30 percent Senate rejected the Paying a Fair Share Act

31 2013 PERSONAL Itemized Deduction Phase Out Reduces itemized deductions by 3% of the amount by which AGI exceeds threshold, not to exceed 80% Single $250,000, MFJ $300,000

32 2013 PERSONAL Personal Exemption Phase Out Reduces exemption by 2% for each $2,500 (or portion thereof) by which AGI exceeds threshold. Single $250,000, MFJ $300,000

33 2013 PERSONAL Patient Protection and Affordable Care Act Two Parts 0.9% increased Medicare tax due on wages over $200,000 (single) and $250,000 (MFJ) 3.8% surtax on at least a portion of investment income such as capital gains, dividends, and net rental income

34 2013 PERSONAL Example 1: Single taxpayer Self-employed $500,000 earnings $500,000 -$200,000 $300,000 subject to 0.9% surtax

35 2013 PERSONAL 0.9% surtax Employers required to withhold from wages in excess of $200,000 MFJ If each makes $175,000, then no withholding of 0.9% tax by employer, paid on joint tax return. No employer match on the 0.9% tax

36 Example 2: Single taxpayer $0 Wages $225,000 Net Investment Income $225,000 -$200,000 $ 25,000 subject to 3.8% surtax 2013 PERSONAL

37 2013 PERSONAL Example 3: Married taxpayer $200,000 Combined Wages $150,000 Net Investment Income $350,000 -$250,000 $100,000 subject to 3.8% surtax Lesser of Net Investment Income or Excess of MAGI over threshold

38 2013 PERSONAL Example 4: Married taxpayer $260,000 Combined Wages $ 10,000 Net Investment Income $270,000 -$250,000 $ 20,000 However, only $10,000 subject to 3.8% surtax Lesser of Net Investment Income or Excess of MAGI over threshold

39 Net Investment Income 2013 PERSONAL

40 2013 PERSONAL Should never be subject to both 3.8% surtax on net investment income and the 0.9% tax on earned income on the same stream of income. Entity Materially Participate 3.8% Tax 0.9% Tax S Corp Yes No No S Corp No Yes No Partnership Yes No Yes Partnership No Yes No

41 2013 PERSONAL Planning Consideration Active versus passive Passive income can be used to offset passive losses Passive income subject to 3.8% tax

42 IRS AUDIT Statistics ( Exam Coverage C Corporations (total assets) <$250K 0.9% $250K- $1M 1.6% $1M - $5M 1.9% $5M 10M 2.6% >$20B 95.6%

43 IRS AUDIT Statistics ( Exam Coverage Individuals Total 1.1% Income $200K - $1M 3.2% Income > $1M 12.5%

44 IRS AUDIT Open Discussion Currently under exam? Past exams? Handled internally or by CPA Firm?

45 CONTACT Jim Forbes, CPA Tax Principal Skoda Minotti