If you thought that discussion of changes to tax laws/rules would stop (or at least slow down) after the President signed the American Taxpayer Relief Act of 2012, you were very much mistaken. The ink was barely dry on the law that “permanently extended” the “Bush” tax cuts for most individuals (addressing the “fiscal cliff”) when talk of tax law adjustments to address continued federal spending and increasing the “debt ceiling” began.

The debt ceiling can was kicked down the road and may not become an issue again until the fall, when changing the tax code will be the focus of reformers who want changes in the code as a condition for raising the government’s borrowing limit. In the meantime, both houses of Congress and the President are working now on their 2014 budget proposals. Each version of the proposed budgets thus far indicates a desire by all parties to adjust the federal tax code to achieve their political ends. “Tax reform” is a key element in all of the budget proposals.

Keep in mind: the end result of these budget discussions will probably be some form of compromise; most of the radical suggestions likely will not be included in the version that ultimately becomes law. However, a couple of ideas are common among the competing proposals:

• Limiting Itemized Deductions. The President’s proposal includes a limitation of itemized deductions on higher income individuals. The House proposal calls for an examination of itemized deductions, and the Senate budget proposal calls for a limit on the itemized deduction for the top two percent of income earners. It’s a safe assumption that whatever budget is finally passed and signed will include some limit or reduction of individual itemized deductions.

• Section 179 Immediate Expensing. The President has proposed making permanent the current $500,000 annual limit on businesses for code section 179 expensing of qualified property and indexing the limit for inflation. The current limit is scheduled to expire at the end of this year. The House Ways and Means Committee has suggested a permanent limit of $250,000. Section 179 is a popular provision in the tax code, and I expect that a permanent adjustment will be made to this code section to keep these higher than historical limits.

The House and Senate proposals place special emphasis on tax simplification without giving many (if any) specifics on what that would mean. Simplification seems to be a popular idea, but there don’t seem to be many new ideas (Fair Tax, Flat Tax) on how to accomplish it.

We won’t know what the final 2014 budget will include until it is actually passed and signed into law. But we do know that no matter what, continual adjustments or tweaks to current and new laws will impact the taxes we pay. Staying up-to-date and informed is more vital than ever. If you have any questions or comments, please post them here or email me.

Photo courtesy of: StandUPP on Flickr

While some of the most discussed provisions of the Patient Protection and Affordable Care Act of 2010 don’t go into effect until 2014, the act will have an impact on businesses and individuals starting this year. Awareness and planning are vital to making sure you are properly prepared for the impact of this act on you and your business. Below is the text of a recent alert issued by Warren Averett.

IRS Releases Guidance on Health Care Act’s “Play or Pay” Provisions

The IRS has issued extensive proposed regulations implementing the employer-shared responsibility provisions, also known as “play or pay,” of the Patient Protection and Affordable Care Act of 2010. The regulations address numerous topics, including which employers must provide health coverage, the requirements for such coverage and the penalties for failing to provide insurance.

Although the shared responsibility provisions do not take effect until 2014, employers will use information about the workers they employ in 2013 to determine whether they’re subject to the provisions and face the potential for penalties in 2014.

Shared Responsibility Basics

Beginning on January 1, 2014, the health care act requires “large” employers to offer a “minimum value” of “affordable” health coverage to their full-time employees. Employers risk a penalty if at least one of their full-time employees receives a premium tax credit for purchasing individual coverage through one of the new affordable insurance exchanges. (Under the health care act, premium tax credits are available to employees who meet certain income requirements and don’t have access to affordable employer-provided insurance.)

A large employer is one with at least 50 full-time employees, or a combination of full-time and part-time employees that’s “equivalent” to at least 50 full-time employees. A full-time employee is someone employed on average at least 30 hours per week. Under the proposed regulations, 130 hours of service in a calendar month is the monthly equivalent of 30 hours per week.

Determining Large Employer Status

Large employer status is determined in part by calculating full-time equivalent employees (FTEs). For a given calendar month, this requires totaling the hours of service for all part-time employees, and dividing that figure by 120. For example, an employer with 40 part-timers who average 90 hours per month would have 30 FTEs (40 × 90 = 3,600; 3,600/120 = 30) who must be added to the number of full-time employees (those working at least 130 hours during the month) when determining whether the 50-FTE threshold is met.

For hourly employees, the proposed regulations require the hours to be calculated based on records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.

Employers must determine annually, based on their employees’ actual hours of service, whether they’ll be considered a large employer for the next year. For 2014, however, the proposed regulations provide transitional relief. Rather than considering all 12 months of 2013, you can use any six-consecutive-month period. That means you could select six months toward the beginning of the year and use the remainder of 2013 to determine whether you need to offer coverage in 2014 and, if so, establish a compliant plan.

Assessing Affordability and Minimum Value

An employer that offers health coverage could nonetheless be subject to penalties if at least one full-time employee receives a premium tax credit because the coverage offered to the employee was either (1) unaffordable or (2) didn’t provide minimum value.

Generally, if an employee’s share of the premium would cost that employee more than 9.5% of his or her annual household income, the coverage isn’t considered affordable. The proposed regulations lay out three safe harbors that employers can use to satisfy the affordability requirement. An employer will avoid a penalty if:

1. The cost of the coverage (single coverage) won’t exceed 9.5% of the Form W-2 wages the employer pays the employee that year, (a look back approach);
2. The employee’s monthly contribution amount for the self-only premium is equal to or lower than 9.5% of the computed monthly wages, (a current pay approach); or
3. The employee’s cost for self-only coverage doesn’t exceed 9.5% of the federal poverty line for a single individual.

The affordability test applies to the lowest cost option available to the employee that also meets the minimum value requirement. Therefore, employers can offer higher value/cost plans in their menu of insurance choices without violating this provision.

Under the minimum value requirement, a health plan must cover at least 60% of the total allowed costs of benefits provided under the plan. This concept has drawn most of the attention from employers. The common question is: “How do I know that my plan meets this 60% test?” The IRS and the U.S. Department of Health and Human Services will make available an online minimum value calculator where employers can enter certain plan information and obtain a determination of whether the plan provides minimum value.

Calculating Penalties

Large employers that don’t provide at least 95% of their full-time employees (and, after 2014, their dependents, defined as an employee’s children under age 26) with health coverage will be assessed a penalty if just one of these employees receives a premium tax credit when buying insurance in an insurance exchange. The annual penalty is $2,000 per full-time employee in excess of 30 full-time employees.

Employers that provide at least 95% of their full-time employees (and, after 2014, their dependents) with coverage that isn’t deemed affordable or that fails to provide minimum value generally must, if at least one employee receives a premium tax credit, annually pay the lesser of $3,000 for each employee receiving the credit or $2,000 for each full-time employee beyond the first 30 full-time employees.

For purposes of penalty calculations, full-time employees don’t include FTEs, only actual full-time employees. The proposed regulations describe how to determine which employees are treated as full-time employees for penalty purposes, including rules for assessing the status of ongoing employees, new hires and variable-hour or seasonal workers, as well as for other special circumstances.

Related Companies

Companies that share a common owner or are otherwise related are combined for purposes of determining whether they’re a large employer; the proposed regulations include rules for determining whether companies are related. If the combined total meets the 50 FTE threshold, each separate company is subject to the shared responsibility provisions – even those that don’t individually employ enough employees to satisfy the threshold.

The rules for combining related employers do not, however, apply when determining liability for and amounts of penalties. Employers that offer appropriate coverage, therefore, won’t be subject to penalties simply because another employer in its group fails to offer the coverage to its employees.

Moving Forward

The proposed regulations would be effective for periods starting after Dec. 31, 2013. In the meantime, employers can rely on the proposed regulations for purposes of compliance with the shared responsibility provisions. If the final regulations are more restrictive, the IRS will give employers time to come into compliance.

Warren Averett is well-informed on the complex issues of health care reform. And the key is to start planning now so the right decisions can be made for your company. As always, if you have questions or concerns, don’t hesitate to comment below or email me.

The President signed the American Taxpayer Relief Act of 2012 on January 2, 2013. This expansive legislation addressed the expiration of many of the tax reductions that had been in place since 2001-2003 by extending many of them for individual filers with adjusted gross income below $450,000 for those who are married filing jointly and $400,000 for those filing as an individual. The act is very detailed and has significant ramifications for business filers as well, as described in this alert from Warren Averett LLC.

In response to the late passage of this act, the IRS has delayed the start of filing season for individual filers. The IRS will not begin accepting individual returns until January 30, 2013 for the 2012 filing season. They have also indicated that several forms won’t be ready for acceptance until sometime in mid-February at the earliest. So if your 2012 return will have depreciation/amortization (Form 4562), residential energy credits (Form 5695) or general business credits (Form3800), you won’t be able to file until the IRS releases the forms for processing.

The act impacts almost every taxpayer, and combined with the 3.8% Net Investment Income Tax and the Mandatory 0.9% Medicare Tax Withholding, has made tax planning as crucial as ever. Contact your tax professional for help in determining how the American Taxpayer Relief Act of 2012 impacts you.

The election was a month ago, but it did nothing to clear up the fiscal picture coming out of Washington, D.C. It may not have mattered what the results of the election were in that the momentum toward the fiscal cliff may be beyond our elected representatives’ ability to control.

A colleague recently forwarded me the video, “What’s at Stake? A CPA’s Insights into the Federal Government’s Finances,” from the American Institute of CPAs (AICPA). The video attempts to put our national government’s fiscal path into some nonpartisan perspective. In viewing the video, you will notice that the speaker analogizes the finances of the federal government to that of a corporation. The speaker doesn’t out right say it, but it is implied, that if a CPA were to issue an audit report on the government as if it were a corporation, there would be doubt about the government’s ability to continue as a going concern.

Only two things can be done to address this issue: raise revenue (increase tax collections) and decrease spending. A balanced approach would be the most logical course of action, but what we are more likely to see is an increase in current tax rates with the promise of some unspecified reduction of spending in the future.

Regardless of what happens in the negotiations to extend the current tax rates and avoid the fiscal cliff, two tax increases will almost certainly come into effect on January 1, 2013:

1. Medicare Contribution Tax – 3.8 percent tax on investment income for “higher income” individuals. Investment income is being defined as income from interest, dividends, annuities, royalties, rents and passive activity income, as well as income from the disposition of property that is not held in an active trade or business.
2. Additional Medicare Tax – 0.9 percent applied to total wages, other compensation and self-employment income of “higher income” individuals.

For purposes of these additional taxes, “higher income” is defined as Adjusted Gross Income in excess of $250,000 for married couples filing jointly, $125,000 for married couples filing separately and $200,000 for single filers.

In this uncertain environment, it is more important than ever before to consult with your tax advisor. One idea you’ll want to discuss with your advisor is possibly recognizing your investment income—particularly long-term capital gains—this year. This may help you avoid the additional Medicare Contribution Tax. This additional tax, plus the possibility of long-term capital gains being subject to a 20 percent tax rate (if the current tax rates expire), would have a significantly negative impact on your investment returns. As always, I welcome your questions via email or in the comments below.

I was recently asked if I had any scary stories that I could contribute to a presentation that was going to be made around Halloween. I said that I didn’t have any scary stories in the traditional sense of ghosts and goblins, but that some of the things happening in the areas of tax administration and compliance certainly qualified as frightening.

One of the scariest things happening is the staggering amount of tax fraud being perpetrated by identity thieves. This article says that “The inspector general of the IRS estimates that the service could issue as much as $21 billion in fraudulent tax refunds over the next five years.” Here is the press release from the Treasury Inspector General for Tax Administration on this issue, which makes the issue seem even worse.

In many cases, criminals are acquiring the names and social security numbers of individuals and then filing false returns where they claim one or more of the refundable tax credits. These false returns generate a refund that is deposited directly into the fraudster’s bank account. The funds are most likely withdrawn or transferred very quickly after deposit, and the possibility of recovering the funds from the thieves is very small.

Victims of identity theft typically only find out that they’ve been victimized after they attempt to file their legitimate return and it is rejected by the IRS (as being a duplicate filing), or when the IRS starts sending notices that there is a deficiency on the account for claiming a refund for which they weren’t entitled.

If you discover that you’ve been victimized by identity theft, here is the IRS’s guide for the actions that you need to take when your tax records have been compromised. The Federal Trade Commission has this guide to recover from identity theft when it has impacted other aspects of your financial records.

There’s no way to guarantee that you won’t be a victim of ID theft, but the harder you can make it on the thieves, the less likely they will target you. As the saying goes, “an ounce of prevention is worth a pound of cure.” Here is the FTC’s guidance on minimizing your risk of being an ID theft victim.

One of the phrases you may be hearing a lot these days is “Taxmageddon.” This is a term the media has coined for the cumulative effect of:

• Expiration of the 2001/2003 tax cuts (extended in 2010);
• Expiration of various other tax relief provisions;  and
• Implementation of some of the provisions of the Affordable Care Act.

All of this occurs after December 31, 2012, i.e., effective starting January 1, 2013.

Some of the tax provisions scheduled to expire after December 31, 2012, that directly impact businesses, are:

• Bonus depreciation (IRC Sec. 168(k)) – Currently, qualified property placed in service before January 1, 2013 is eligible for an additional first-year depreciation allowance of 50 percent of its adjusted basis.
• Expense of certain depreciable business assets (IRC Sec. 179) – For 2012, businesses are allowed to immediately expense up to $139,000 of eligible property. In 2013 and beyond, this limit is scheduled to be $25,000.

Many businesses are organized as “flow-through” entities. This means that their items of income or loss are not directly taxed at the entity level; instead they are passed through to their partners, members or shareholders. In most cases, the income/loss from these businesses is taxed at the individual level. Many of the expiring or changing provisions of “Taxmageddon” have a direct impact on individual taxation, and consequently, indirectly impact these related businesses.

The individual tax provision that will most impact business considerations for “flow-through” entities is the increase in individual marginal tax rates taking effect on January 1, 2013. The 2012 marginal tax rates are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. Starting in 2013, these marginal tax rates are scheduled to revert back to their pre-2001 amounts of 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent. This change represents a significant potential tax increase even for businesses with modest income.

Many suggest that the government will act to prevent this rapid increase in taxes because of the significant impact it will have on the economy. In an election year, this may not be as likely as we would hope. Certainly, we aren’t likely to get any change in the law until after the November elections. This leads to a great deal of uncertainty and many are starting to make plans under the assumption that massive tax hikes will arrive next January.

Traditional tax planning involves the analysis of the unique situation every business and its owners face. This tends to include the identification of expenses that can be accelerated into the current period to reduce current income, as well as the identification of income that can be deferred into future periods. With the potential of significant tax increases on the horizon, there are many situations where these traditional tax planning techniques will be revised to try and maximize 2012 income to take advantage of the lower tax rates, and expenses may be deferred in order to reduce future income.

However, until the 2013 tax situation is known for sure, many people will want to delay as long as possible before acting. While some actions must be completed by year-end to impact 2012, other actions can be delayed until next year and still be effective for 2012 tax reporting. For example, certain retirement plan contributions don’t have to be made until the due date (plus extensions) of the tax return for the year to which they apply, and some tax accounting methods can be changed or implemented within that time frame as well.

Consult your tax advisor about your specific situation and how the coming “Taxmageddon” may impact you and your business. If you have any questions or comments, please post them here or email me.

As you’re likely aware, the U.S. Supreme Court held to be constitutional the Patient Protection and Affordable Care Act (PPACA) on June 28, 2012. Former Speaker of the House Nancy Pelosi once said this law that radically changes the U.S. health insurance system was so complex that it “had to be passed in order to find out what was in it.”  The issue under consideration by the court was the constitutionality of the “Individual Mandate”—the imposition of a penalty (now a tax) on an individual for not purchasing health insurance. While the Individual Mandate was only one piece of this expansive law, had it been ruled unconstitutional, the rest of the PPACA would likely have followed, and we wouldn’t have to be concerned about its upcoming implementation. C´est la vie.

The PPACA has numerous impacts on individuals and businesses, and the full picture of its effect may not be clear for several years. Barring repeal, which seems unlikely, one part of this law will require your attention as a business owner in the near term, as it takes effect starting in 2014.

Shared Responsibility

Shared responsibility is the term used in the text of the law to refer to what many call the “employer mandate,” which is effectively the business side of the Individual Mandate. The PPACA does not (technically) require employers to provide health insurance coverage. However, “large” employers—defined as employers with 50 or more full-time (average at least 30 hours per week) employees—will be subject to “shared responsibility” rules after 2013.

The shared responsibility rules impose penalties on large employers that have full-time employees utilizing the health insurance exchanges established under PPACA, and getting a premium assistance credit available to taxpayers whose household income is at least 100% but not greater than 400% of the federal poverty level. These penalties can be imposed under several different scenarios:

• Not offering health insurance coverage. If you fail to offer your full-time employees and their dependents the opportunity to enroll in minimum essential coverage (IRC Sec. 5000A(f)), and at least one full-time employee is enrolled in an insurance exchange and receives a premium assistance tax credit, your business will be subject to a penalty of up to $2,000 per employee per year.
• Offering “inadequate” health insurance coverage. If you offer your full-time employees and their dependents the opportunity to enroll in minimum essential coverage, and any full-time employee is enrolled in an insurance exchange and receives a premium assistance tax credit, your business can be subject to a penalty of as much as $3,000 per employee per year. There is a cap on the total penalty under this scenario of $2,000 per year per the number of full-time employees. This seems to be meant to ensure that if you are going to offer coverage, the terms are at least as beneficial to the employees as they could get by going to the insurance exchange.

These rules will require all businesses with employees to file additional information returns with the Internal Revenue Service (IRS). These information returns must identify the individual employees, the coverage you are offering and the amount of premiums being paid (whether by the employee or the employer). Of course, penalties will be imposed for failure to file these information returns.

You should discuss the impact of these new rules on your business with your tax advisor, particularly, if you have 50 or more employees, or are considering the expansion of your business.

Other Items Impacting Businesses

• Small Employer Health Insurance Tax Credit. The PPACA established a temporary credit for small employers (fewer than 25 full-time employees) who offer health insurance to their employees and pay for some portion of the insurance premiums. A recent Wall Street Journal article pointed to a report from the Government Accountability Office that indicated many businesses that are eligible for the credit are not taking advantage of it. Many factors lead potentially-eligible businesses to not claim this credit; it has been our experience that the cost of compliance with the rules is greater than the benefit received. If you think your business could be eligible for the credit, you should check with your tax advisor to see if you are eligible and what it will take for you to get a benefit.
• Health Flexible Spending Arrangement (FSA) Contributions. These contributions are limited to $2,500 per year for tax years beginning after December 31, 2013. Currently, there is a $5,000 per year limit on contributions to these plans.
• Over the Counter Medications.These items are not treated as a qualified medical expense for purposes of health flexible spending arrangements, health reimbursement arrangements, health savings accounts or Archer Medical Savings Accounts. This rule has been in effect since January 1, 2011.

You should also be aware of these additional items that may have some impact on your tax situation.

• Additional Medicare Tax. Starting in 2013, an additional Medicare tax of 0.9% (.009) will be imposed on wages and self-employment income exceeding $200,000 (single filers) and $250,000 (married filing joint). In the case of married filers, this tax will be imposed on the combined wages of the spouses. Employers will be required to withhold the additional tax on employees who receive more than $200,000 of wages from the employer.
• Medicare Tax on Investment Income. Starting in 2013, an additional tax of 3.8% (.038) will be imposed on net investment income for taxpayers with modified adjusted gross income in excess of $200,000 ($250,000 for married couples filing a joint return). Net investment income is defined as:

 (a) The sum of

• interest, dividends, annuities, royalties, and rents (unless derived in the ordinary course of business); and
• income from passive trade or business; and
• gains from the disposition of property other than property held in an active trade or business (most commonly these would be capital gains, but could be other types of gains depending on specific circumstances)

 (b) Minus investment related expenses.

The PPACA is a very complicated law, and many of the specific rules and regulations that will guide its implementation have yet to be written. As more details emerge, we will endeavor to keep you informed. If you have any questions about the PPACA or any other topic, please email me or leave a comment.

States use tax credits as a means to encourage economic activity in their state, as well as a means to differentiate themselves from other states competing for business development. In an effort to more directly target the drivers of economic growth, Georgia has recently made adjustments to two important tax credits.

Georgia Credit for Qualified Research Expenditures (O.C.G.A. Sec. 48-7-40.12)

When a Georgia business is allowed the federal income tax credit for qualified research expenses (IRC Sec. 41), that business is also allowed a similar credit under Georgia law. In the past, if the amount of the credit exceeded 50 percent of the entity’s Georgia income tax liability, the remainder had to be carried forward (10 year limit) to be used against future Georgia income tax liabilities. During the first five years of a newly formed business, these excess credits could be used to offset the business’s state payroll tax obligations.

Effective May 3, 2012, (H.B. 868) the five-year limitation on the ability to offset the payroll taxes has been removed. This will allow established businesses the possibility of fully utilizing their Georgia credit for qualified research expenditures.

Georgia Film Tax Credit (O.C.G.A. Sec. 48-7-40.26)

A production company that invests $500,000 or more in film, video, television, music or other qualified production activities may claim a credit against Georgia income tax equal to 20 percent of the base investment amount, plus an additional 10 percent if the qualified production activities include a “qualified Georgia promotion.”

This credit was originally enacted in 2004 and has been a boon to the state’s entertainment industry. The fact that this credit is transferable has been especially effective in helping it generate economic activity in the state. This has allowed production companies to sell these credits in the tax credits marketplace, thereby monetizing credits that may otherwise be unused as the production companies themselves may have very little Georgia taxable income.

In an effort to better monitor the types of businesses that are claiming this credit, the state has added a category for “Qualified Interactive Entertainment Production Company.” These are businesses whose gross income is less than $100 million that are primarily engaged in qualified production activities related to interactive entertainment (i.e., video game production companies, part of the multibillion dollar gaming industry which has been attracted to the state over recent years. This includes Electronic Arts and others.)

The adjustment to this law, effective May 2, 2012, (H.B.1027) provides that the cumulative maximum amount of credits allowed to Qualified Interactive Entertainment Production Companies is $25 million with a maximum of $5 million to any one company or its affiliates. Previously, these companies were included in the “other qualified production activities” and not limited in the amount of the available credit.

If you have questions about how these or other credits can impact you and your business, comment on this post or email me.