Lets Talk Taxes Jim Forbes, CPA February 12, 2013 AGEND GENDA - PowerPoint PPT Presentation

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

AGEND GENDA “The income tax had made more liars out of the American people than golf.” – Will Rogers “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

AGEND GENDA • 2012 Planning • 2013 Business tax changes • 2013 Personal tax changes • IRS Audits

OVER VERVIEW VIEW • Senate vote 89-8, House 257-167 • 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

2012 PL 2012 PLANNIN ANNING 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

2012 PLANNIN 2012 PL ANNING 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

2012 PLANNIN 2012 PL ANNING 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

2012 PLANNIN 2012 PL ANNING Section 179 - 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

2012 PLANNIN 2012 PL ANNING Research Tax Credit • Extended 10 times since 1980 • Expired December 31, 2011 • Extended through December 31, 2013 • President wants to make this permanent

2012 PL 2012 PLANNIN ANNING • 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

2012 PL 2012 PLANNIN ANNING 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

2012 PL 2012 PLANNIN ANNING 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%) 350,000 385,000 R&D Credit 65,000 100,000 Federal Tax Due 285,000 285,000

2012 PL 2012 PLANNIN ANNING 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

2012 PL 2012 PLANNIN ANNING 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)

2012 PL 2012 PLANNIN ANNING 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)

2012 PLANNIN 2012 PL ANNING 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 200949040) – 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

2012 PL 2012 PLANNIN ANNING 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

2012 PLANNIN 2012 PL ANNING 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.

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

2013 B 2013 BUSINESS USINESS 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

2013 BUSINESS 2013 B USINESS 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

2013 BUSINESS 2013 B USINESS 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

2013 B 2013 BUSINESS USINESS 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.

2013 BUSINESS 2013 B USINESS • Section 179 increased • Research Tax Credit extended

2013 PERSONAL 2013 PERSON AL 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

2013 PERSON 2013 PERSONAL AL

2013 PERSON 2013 PERSONAL AL

2013 PERSON 2013 PERSONAL AL 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

2013 PERSON 2013 PERSONAL AL 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

2013 PERSONAL 2013 PERSON AL 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. • 2012 – Senate rejected the “Paying a Fair Share Act”

2013 PERSONAL 2013 PERSON AL 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

2013 PERSONAL 2013 PERSON AL 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

2013 PERSONAL 2013 PERSON AL 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

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

2013 PERSONAL 2013 PERSON AL 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

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

2013 PERSONAL 2013 PERSON AL 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

2013 PERSON 2013 PERSONAL AL 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

2013 PERSON 2013 PERSONAL AL Net Investment Income