THOMAS, HEAD & GREISEN, c

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1 THOMAS, HEAD & GREISEN, c Kevin E. Branson, CPA John A. Letourneau, CPA Debra K. Mason, CPA/CFF, CFE Erich R. Lamirand, CPA Cindy L. Hulquist, CPA CERTIFIED PUBLIC ACCOUNTANTS Ronald E. Greisen, CPA/ABWCFF 2013 December Year-End Tax Planning: Business Tax Considerations Dear Clients & Friends: This year end provides unique opportunities for virtually every business to reassess their business plan with an eye toward maximizing tax savings for the 2013 tax year and forward, for 2014 and beyond. This year, shareholders and other business owners face a new landscape of tax rates for "higher income" individuals in the form of a 39.6 percent income tax rate, a 20 percent maximum tax rate on capital gains and dividends, a 3.8 percent net investment income tax, and a 0.9 percent Medicare compensation surtax for the first time in New as well are requirements and opportunities surrounding the tax treatment of repairs, improvements, acquisition costs and other common business expenses. Further, some of the usual tax breaks for businesses may be coming to an end with 2013, if Congress does not renew them may provide the last chance for businesses to take advantage of bonus depreciation, enhanced "section 179" expensing, and a sunsetting work opportunity credit. Finally, although the "employer mandate" under the new health care reform law was recently postponed from 2014 to 2015, now is not too early to start planning to comply with rules that will be based on employee makeup starting January 1, Bonus depreciation Bonus depreciation is scheduled to end after 2013 if not renewed by Congress. Additional 50percent bonus depreciation was extended by the American Taxpayer Relief Act of 2012 (ATRA, signed into law on January 2, 2013) for one-year only and applies to qualifying property placed in service before January 1, In the case of property with a longer production period and certain noncommercial aircraft, the extension also applies to property acquired before January 1, 2014 and placed in service before January 1, Unlike regular depreciation, under which half- or quarter-year conventions may be required, a taxpayer is entitled to the full, 50-percent bonus depreciation irrespective of when during the year the asset is purchased. Year-end placed-inservice strategies therefore can provide an almost immediate "cash discount" from qualifying purchases, even when factoring in the cost of business loans to finance a portion of those purchases. Bonus depreciation is available only for new property (i.e., property whose original use begins with the taxpayer) depreciable under MACRS that (a) has a recovery period of 20 years or less, (b) is MACRS water utility property, (c) is computer software depreciable over three years, or (d) is qualified leasehold improvement property. A taxpayer may elect out of bonus depreciation with respect to any class of property placed in service during the tax year. Although this election may be factored into a year-end strategy, a final decision on making it is not required until a return is filed next year. Luxury car depreciation caps - Along with the sunset of general bonus depreciation, the additional $8,000 first-year depreciation cap for passenger automobiles to account for bonus depreciation will no longer be available for vehicles acquired and placed in service after T.(907) F.(907) I 1400WestBensonBIvd. Suite400, Anchorage, Alaska I

2 December 31, For some businesses, this may provide an added incentive to purchase and place into service a vehicle before year end property for expensing purposes includes qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Any amount of expensing for qualified real property disallowed by reason of the taxable income limitation, however, may not Code Section 179 expensing be carried forward to a tax year that begins after 2013 and such amount must be recovered An enhanced section 179 expense deduction is through regular depreciation deductions only. available until 2014 for taxpayers (other than estates, trusts or certain noncorporate lessors) that elect to treat the cost of qualifying property Work Opportunity Credit (so called section 179 property) as an expense rather than a capital expenditure. The current The Work Opportunity Credit, which has been section 179 dollar cap for 2013 is $500,000. For extended at various times in various iterations, tax years beginning after 2013, that dollar limit is ends on December 31, To qualify for the officially scheduled to plunge to $25,000 unless credit, an employer must hire members of certain otherwise extended by Congress. For tax years targeted groups and have those individuals start beginning in 2013, the overall investment work before January 1, Targeted groups, limitation is $2 million. That level is also as listed in Code Sec. 51, include qualified scheduled to fall to $200,000 in individuals in families receiving certain government benefits, including Title IV-A social A taxpayer will receive the greatest benefit from security benefits (aid for dependent children) or Code Section 179 by expensing property that food stamps; qualified individuals who receive does not qualify for bonus depreciation (e.g., supplemental social security income or long-term used property) and property with a long MACRS family assistance; veterans who are members of depreciation period. For example, given the families receiving food stamps, who have servicechoice between expensing an item of MACRS connected disabilities, or who are unemployed; five-year property and an item of MACRS 15- designated community residents; vocational year property, the 15-year property should be rehabilitation referrals certified to have physical or mental disabilities; and others. expensed since it takes 10 additional tax years to recover its cost through annual depreciation Employers are eligible for the work opportunity deductions. credit to the extent that qualifying employees are certified as members of a target group by a Qualifying property- Section 179 property is generally defined as new or used depreciable designated local agency (DLA). On or before the tangible section 1245 property that is purchased day the employee begins work, the employer for use in the active conduct of a trade or must receive a written certificate from the business. Off-the-shelf computer software is also designated local agency indicating that the included for 2013, as is qualified real property employee is a member of a specific targeted (up to $250,000). Both of these latter types of group. Employers can use Form 8850 Preproperty will no longer qualify for section 179 Screening Notice and Certification Request for expensing at all after 2013, even at the lower the Work Opportunity Credit, to obtain the certification. The IRS allows forms to be $25,000 ceiling, making strategies that take submitted electronically to DLAs with receipt advantage of them in 2013 particularly critical. systems that meet IRS standards. Alternatively, Qualified real property - After four years, the as part of a written certification request, the section 179 expensing allowance for qualified employer may complete a prescreening notice on real property is scheduled to end for property or before the day the employee is offered a job, and submit the notice to the designated local placed in service after Qualified real Members of Western Association of Accounting Firms Associate Offices in: Bellevue, Chico, Colusa, Eugene, Fresno, Laguna Hills, Palo Alto, Pasadena, Phoenix, Pleasanton, Portland, Rancho Cucamonga, Redding, Reno, San Francisco, and Westlake

3 agency within 28 days after the employee commences work. The credit is generally equal to 40 percent of the qualified worker s first-year wages up to $6,000 ($3,000 for summer youths and $12,000, $14,000, or $24,000 for certain qualified veterans). For long-term family aid recipients, the credit is equal to 40 percent of the first $10,000 in qualified first year wages and 50 percent of the first $10,000 of qualified secondyear wages. Small Business Stock ATRA 12 extended the 100-percent exclusion allowed for gain on the sale or exchange of qualified small business stock under Code Section The stock must be acquired before January 1, 2014, and then held for more than five years by noncorporate taxpayers. Preferential AMT treatment also applies. The exclusion under Code Section 1202 after 2013 reverts to a 50 percent exclusion. Eligible gain from the disposition of qualified stock of any single issuer is subject to a cumulative limit for any given tax year equal to the greater of: (1) $10 million ($5 million for married taxpayers filing separately), reduced by the total amount of eligible gain taken in prior tax years; or (2) 10 times the taxpayer s adjusted basis in all qualified stock of a corporation disposed of during the tax year. Revised Repair / Capitalization Rules The I RS recently issued long-awaited comprehensive final rules on the treatment of payments to acquire, produce or improve tangible property. Starting January 1, 2014, businesses must use these new rules in determining whether they can deduct their costs as repairs under Code Sec. 162(a) or must capitalize the costs, to be recovered over a period of years under Code Sec. 263(a). Businesses will benefit if certain procedures for treating expenses are put into place by January 1, Some businesses will be better off if they start applying the new rules retroactively to the 2012 and 2013 tax years. Many of these decisions require advance planning. Pass-through Issues Many business operations are not taxed on the entity level as corporations but, instead, pass through taxable profits and losses to their unincorporated owners or to their S corporation shareholders. Starting in 2013, these owners face new year-end planning challenges in the form of a higher individual tax rate of 39.6 percent and additional surtaxes on passive income by way of the net investment income surtax of 3.8 percent and the Additional Medicare Tax of 0.9 percent on compensation, both aimed at the "higherincome" taxpayers. Deferring some of this income, or harvesting losses to offset some of the income, are traditional year-end planning techniques that take on added value for the 2013 year-end tax year. Based upon all that is new and all that may be expiring in 2013, many businesses can benefit from a fresh assessment of how year-end tax planning can help reduce their overall tax liability for both 2013 and Please contact this office if you have any questions regarding the opportunities presented in this letter or would like a more customized analysis of steps your business may take at yearend 2013 to minimize taxes and maximize overall tax opportunities. Members of Western Association of Accounting Firms Associate Offices in: Bellevue, Chico, Colusa, Eugene, Fresno, Laguna Hills, Palo Alto, Pasadena, Phoenix, Pleasanton, Portland, Rancho Cucamonga, Redding, Reno, San Francisco, and Westlake T.(907) F.(907) I 1400 West Benson Blvd. Suite400, Anchorage, Alaska I

4 INSIDE TH&G I~ I, I~ I~ Jarek Kupczynski joined Thomas, Head & Greisen, PC in December 2013 as a Staff Accountant. He graduated from the University of Alaska Anchorage in the spring of 2013 where he received his degree in Accounting. Having lived in Anchorage his whole life, Jarek enjoys many outdoor activities such as rock climbing, skiing and most of all mountain biking. Please join us in welcoming Jarek to Thomas, Head & Greisen. Our staff attended the following classes for Continuing Professional Education (CPE) credit: Western CPE Implementing ObamaCare in 2013 & Beyond - Christopher attended this one and a half day conference where the Utah Health Exchange Executive Director, Montana Insurance Commissioner and other industry experts presented topics such as: Understanding the Individual Mandate, Understanding the Employer Mandate, and Minimum Essential Health Coverage Requirements. Additionally, planning strategies for the additional 3.8% Medicare tax on Net Investment Income and the additional 0.9% Medicare tax on wages & self-employment income were discussed. Attendee: Christopher L. Houde, CPA AKCPA Sargent McCoy s Handbook for Mastering Basis, Distributions, and Loss Limitation Issues for S Corporations, LLCs and Partnerships - Staff members attended this class that provided applicable coverage of the tax acts of 2012 and new legislation. For S Corporations, some of the topics included how to calculate basis, how to understand the effect of stock basis and debt basis, and when one can have a taxable dividend in an S Corporation. Information for LLCs and Partnerships included learning the difference between basis and at-risk basis, reviewing how to apply complex rules of distribution of cash versus property and the planning strategies, and how hot assets can change the game for distributions. Attendees: Tami Holt, CPA; Christopher Houde, CPA; Thomas Huling, CPA; Audrey Lance, CPA; and Benjamin Persinger Ron Greisen, CPA/ABV/CFF attended the following CPE classes: What You Need to Do Now in Estate Planning Under the New Tax Law One day course in Philadelphia, PA AICPA National Tax Conference Three day course in National Harbor, Washington Members of Western Association of Accounting Firms Associate Offices in: Bellevue, Chico, Colusa, Eugene, Fresno, Laguna Hills, PaloAIto, Pasadena, Phoenix, Pleasanton, Portland, Rancho Cucamonga, Redding, Reno, San Francisco, and Westlake

5 THOMAS, HEAD & GREISENo c CERTIFIED PUBLIC ACCOUNTANTS TM December 2013 igher income taxpayers beware. There is H a new surtax to contend with. Originating as a component of 2010 health care legislation and first effective in 2013, the 3.8% net investment income tax (3.8% NIIT) is assessed on the lesser of net investment income NII can be reduced currently by: (NII) or modified adjusted gross income (MAGI) above specific thresholds. The MAGI thresholds are $200,000 for single individuals, $250,000 for joint fliers and surviving spouses, Using an and $125,000 for married taxpayers filing separate returns. Only individual taxpayers with some amount of NII and MAGI above the applicable threshold amount will be subject to the 3.8% NIIT. In other words, taxpayers with only wage or self-employment income are exempt. For example, if a married couple has $500,000 of wage income and $100,000 of interest and dividend income (i.e., MAGI totaling $600,000), the 3.8% NIIT only applies to the investment income ($100,000), not the $350,000 that is over the $250,000 MAGI threshold. Since the 3.8% NIIT is assessed on the lesser of NII or MAGI above the threshold, planning strategies to reduce the surtax will only be effective if they target the applicable exposure point. If NII is the lower number, planning strategies should focus on reducing investment income. If the taxpayer s MAGI is lower, reduction strategies should focus on reducing AGI. The following strategies can be used to reduce NII and AGI. Minimizing the 3.8% Net Investment Income Tax Selling securities at a loss in a taxable account (also reduces AGI). installment sale to spread a large gain over several years (also reduces AGI). Facilitating a likekind exchange to defer gain (also reduces AGI). Gifting appreciated securities instead of cash (also reduces AGI). AGI can be reduced currently by: Maximizing deductable contributions to a tax-favored retirement account, i.e., 401(k), SEP, and defined benefit pension plans. For cash-basis self-employed individuals, deferring business income into the following year and accelerating business deductions into the current year. Gifting appreciated securities to children and letting them sell the appreciated securities to avoid recognizing gains on the parent s (Continued on Page 2.)

6 Year-end Mutual Fund Purchases M any taxpayers make adjustments to their investment portfolio near year-end to take profits, to recognize tax losses, to reallocate their assets, and for various other reasons. When making purchases of mutual funds near year-end, however, you should be wary of actually purchasing a tax liability. or near the fund s year-end. These taxable distributions to shareholders reflect the income and net gains realized by the fund for the period. An equity fund that appears to have a minimal or negative overall return for the year may actually make taxable distributions to shareholders at the end of the year. This is because of gains the fund recognized on appreciation that occurred in prior years. From an investor s standpoint, these distributions do not result in any real net benefit; instead, the distributions are already reflected in the fund s per share value. So after a distribution is made, the share value is reduced accordingly. This is the danger: mutual funds must pay out their gains and income to shareholders at least Because of the income distributions mutual annually to avoid taxation at the fund level. funds must make, the timing of a share Income funds and balanced funds typically purchase in a particular fund can affect your make taxable distributions to shareholders tax liability. Purchasing shares just before the either monthly or quarterly. However, equity record date (i.e., the date that determines which funds often make one annual distribution at shareholders will receive the distribution) is (Continued on Page 3.) 2 Minimizing the 3.8% Net Investment Income Tax (Continued from Page 1.) return (also reduces the parent s NII). Be aware that the Kiddie Tax may apply; however, the child will receive his or her own MAGI exemption from the 3.8% NIIT. Longer-term strategies: Convert traditional retirement account balances to Roth IRAs, but watch out for the AGI impact in the conversion year. In the long run, gains and earnings that build up tax-free in a Roth IRA are not included in either AGI or NII when eventually distributed. Invest in life insurance and tax-deferred annuity products. Life insurance death benefits are generally exempt from ordinary income tax and, thus, from the 3.8% NIIT, as well. Death benefits will not increase the recipient s exposure to the 3.8% NIIT by increasing his or her AGI. Invest in rental real estate and oil and gas properties. Depreciation, intangible drilling costs, and depletion deductions reduce both AGI and NII. Invest in growth stocks and defer gains until the stocks are sold; offset gains with losing positions. Invest in tax-exempt versus taxable bonds, which will reduce both AGI and NIL These are some of the ways to reduce exposure to the 3.8% NIIT. Please contact us if you have Use tax-favored retirement accounts to invest questions or need additional information to in securities that are expected to generate eliminate or minimize your exposure to this otherwise-taxable gains and dividends. new surtax. O

7 RA owners and beneficiaries who have I reached age 70~A are permitted to make donations to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no charitable deduction on your tax return. But, that is fine because the tax-free treatment of QCDs is the same as an immediate 100% deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages, too. low for computation of the 3.8% NIIT. In addition, you don t A QCD is a payment of an otherwise taxable have to worry about distribution made by your IRA trustee directlythe 50%-of-AGI to a qualified public charity. The funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity. You cannot arrange for more than $100,000 of QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. Unfortunately, this taxpayer-friendly provision is set to expire at year-end unless extended by Congress. Before Congress enacted this beneficial provision, a person wanting to donate money from an IRA to a charity would make a withdrawal from his or her IRA account, include the taxable amount in gross income, donate the cash to charity, and then claim an itemized charitable donation. Qualified Charitable Distributions QCDs are not included in your adjusted gross income (AGI) on your federal tax return. This helps you remain unaffected by various unfavorable AGI- ~ based phase-out rules. It also keeps your AGI Volm poor social... charitable red~~e po~e~ limitation that can delay itemized deductions for garden-variety cash donations to public charities. QCDs also count as payouts for purposes of the required minimum distribution (RMD) rules. Therefore, you can donate all or part of your 2013 R_MD amount (up to the $100,000 limit on QCDs) and thereby convert otherwise taxable RMDs into tax-free QCDs. Individuals can arrange to simply donate amounts that they would normally be required to receive (and pay tax on) under the RMD rules. Note that the charity must provide you with a record of your contribution. Also, you cannot receive any benefit from the charity in return for making the contribution. If the donor receives any benefit from the charity that reduces the deduction under the normal rules, tax-free treatment is lost for the entire distribution. Year-end Mutual Fund Purchases (Continued from Page 2.) essentially purchasing a tax liability. This is because the (inflated) price of the shares just before the distribution includes the income that if the income is distributed, the cash received plus the share value equals the shareholder s investment before the distribution). Thus, mutual fund investors should pay particular attention to when they invest. This is is about to be paid out. especially true for equity funds that make only one distribution each year. So be sure to check When the distribution is made, the price with the mutual fund company to determine per share falls, though the total investment the status and nature of any forthcoming value remains the same (i.e., if the income dividends when purchasing equity mutual distribution is reinvested, the shareholder nowfunds late in the year to avoid an unexpected owns more shares with a lower value per share; tax liability. O

8 THOMAS HEAD & GREISEN PC 1400 W BENSON BLVD STE 400 ANCHORAGE AK The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax-related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax-related matter addressed herein. The Tax and Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, 91ease contact us for advice on how the information applies in your specific situation. Tax attd Business Alert is a trademark used herein under license. Copyright Itemized Medical Deductions B 4 efore this year, you could claim itemized deductions for medical expenses paid for you, your spouse, and your dependents to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). But the rules have changed for the worse in 2013 and beyond. Due to the 2010 Affordable Care Act, the old 7.5%-of-AGI hurdle is now 10% for most taxpayers in An exception applies for taxpayers, or their spouse if married, who are age 65 or older on December 31. They can still use the 7.5%-of-AGI threshold through Many individuals have flexibility regarding when certain medical expenses will be incurred. They may benefit from concentrating expenses in alternating years. That way, an itemized medical expense deduction can be claimed every other year instead of lost completely if it doesn t exceed the threshold. Medical expenses paid for a taxpayer s dependent, such as a parent or grandparent, can be added to the taxpayer s own expenses for itemized medical expense deduction purposes. For a person (other than a qualified child) to be the taxpayer s dependent, the taxpayer must pay more than half of that person s support for the year. If that test is passed, the taxpayer can include medical expenses paid for the supported person--even if the taxpayer cannot claim a dependency exemption for that person. While the taxpayer must still clear the applicable. AGI threshold to claim an itemized medical expense deduction, including a supported person s expenses in the computation can really help. O