New Identity Protection Service Offered by the SC Department of Revenue

Via the SC Association of Certified Public Accountants:
As a result of the 2012 South Carolina Department of Revenue (SCDOR) security breach, the state has partnered with CSID to provide eligible South Carolina taxpayers and businesses up to one year of CSID identity protection services for free. Individual taxpayers, their dependents, and businesses who filed electronic South Carolina tax returns between 1998 and 2012 may be eligible for these services.
Starting Oct. 24, eligible taxpayers can enroll at  www.scidprotection.com or call 855-880-2743 for more information. The deadline to enroll is Oct. 1, 2014. Click here to view the SCDOR-CSID fact sheet.

Employer Alert–Department of Labor information on the Affordable Care Act (Obamacare)

The October 1, 2013 deadline for employers that are covered under Section 18B  (as added by Section 1512 of the Affordable Care Act)  of the Fair Labor Standards Act (FLSA) to provide written notice to their employees informing them of the existence of the “Marketplace” (or Exchange), a description of the services the “Marketplace” will provide, the manner in which the employee may request assistance from the ‘Marketplace”, that the employee may be eligible for a premium tax credit, and that the employee may lose the employer contribution to any health plans offered by the employer if the employee purchases a qualified health plan through the “Marketplace” is fast approaching.  We have included links to several items that we feel may be helpful in guiding you through this requirement.  The first item is Technical Release 2013-02 which provides an overview of the requirements of Section 18B and for whom the requirement is applicable.  The other two items are model notices provided by the Department of Labor.  One model notice covers employers that offer a health plan and the second one is for employers that do not offer a health plan.  The information we have linked is available at the Department of Labor’s website.  That website address is www.dol.gov.  As always, we are available to discuss these matters with our clients so please do not hesitate to reach out to us with any unanswered questions you may have. 

 

Department of Labor – Technical Release 2013-02

Model Notice for employers who offer a health plan to some or all employees

Model Notice for employers who do not offer a health plan

FAQ on Notice of Coverage Options

New Employee Announcements–September 2013

Burch, Oxner, Seale Co. would like to announce that Bart Tucker and Joshua Stone have joined the firm.

Bart is working on completing the requirements for licensure as a South Carolina Certified Public Accountant.  Bart is a recent graduate from Clemson University’s Masters in Professional Accountancy program, and he will be working in the firm as a staff accountant.

Joshua comes to us from Americus, GA where he graduated from Georgia Southwestern State University with a Bachelor of Business Administration in Accounting.  Joshua will be working in the firm as a professional staff associate.

New staff accountants at Burch Oxner Seale Co.

Burch, Oxner, Seale Co. would like to announce that David Mahn and Samantha Myers have joined the firm as staff accountants.  David and Samantha are working on completing the requirements for licensure as South Carolina Certified Public Accountants.  David is a recent graduate from Francis Marion University.  Samantha comes to us from New York where she received dual majors in accounting and finance.

S-Corporation Compensation–What is reasonable compensation?

One of the most complicated questions CPAs get asked by S-Corporation owners often centers around the concept of reasonable compensation.  What is “reasonable compensation”?  There really is no right or wrong answer as each situation is unique.  Over the years, most CPAs have learned that taking zero compensation and large distributions is generally frowned upon by the IRS as there have been numerous cases highlighting this issue.  However, in recent years, the IRS has begun to take on more cases in which some amount of compensation was paid, and their efforts have been fruitful.  The following is an article written by Chris Hesse, CPA that was posted on an AIPCA Insights blog.  Chris is currently serving as the chairman of the S-Corporation Technical Resource Panel for the AICPA.  Hopefully this article will provide you some insight into the recent success of the IRS on the issue of reasonable compensation.

James Sheehy, CPA

 

Via AICPA Insights Blog

Another Lesson on Unreasonably Low Compensation

Posted by Guest Blogger on Jul 25, 2013 in Guest Blogger, Tax

Payroll tax collection continues to vex the Internal Revenue Service despite several court cases that have resulted in rulings favorable for the IRS regarding unreasonably low compensation. A recent high profile case was David E. Watson, P.C. v. United States on which the Eighth Circuit ruled in 2012. Watson was an indirect partner in a CPA firm, practicing through an S corporation that paid him $24,000 of salary per year and between $175,000 and $203,000 in profit distributions. The court adjusted his compensation to $93,000.

It isn’t hard to see why shareholders of S corporations attempt to justify wage levels below what the IRS considers “reasonable compensation” (assuming the understated compensation is below the FICA wage base). Both the S corporation and employee save the 7.65% FICA and Medicare taxes on the wages not reported.

Another recent case is Herbert v. Commissioner. Herbert received between $24,000 and $29,000 of wages for the years 2004 through 2006. In 2007, he received $2,400 of wages. Although the Tax Court noted that the corporation lost money or earned very little income in each of the years, and the corporation closed down in 2009, the Court increased the taxable compensation for 2007. The IRS wanted to reclassify all of the draws from the S corporation for 2007 as additional wages (i.e., an additional $52,600). Ultimately, the judge averaged the petitioner’s wages for 2002 through 2006 to arrive at $30,445 as a reasonable wage. (The business was owned by someone else in 2002 and 2003.)

It didn’t help matters that Mr. Herbert used the draws to pay corporate expenses personally. He lost, misplaced or never kept receipts for many corporate expenses he paid with cash. The Court accepted Herbert’s testimony that he in fact paid significant corporate expenses with cash using funds received from the corporation. Nonetheless, the judge also believed that the wages of $2,400 were too low.

The result? Herbert was found to have under-reported his wages, even though the amount of cash drawn out of the corporation covered corporate expenses. If he had maintained a better set of books, paid all of the corporate expenses with corporate (rather than what became to be personal) funds, he wouldn’t have had distributions from the corporation to himself.

Although the wages were quite low, the fact of the matter is the business was failing. There wasn’t an adequate cash flow to pay wages and expenses. By shuffling funds and taking money personally, Mr. Herbert created a payroll tax liability where such liability shouldn’t have existed.

Payroll tax reduction or avoidance is, perhaps, a major reason for the popularity of S corporation status for an operating entity, even though the formation of an LLC under state law provides similar liability protection for the sole proprietor. The IRS projects that 4.6 million Forms 1120-S will be filed for 2012, compared to 3.6 million Forms 1065 (partnership). 

As part of its tax reform efforts, Congress is evaluating the continuing treatment of the bottom-line S corporation as not subject to payroll taxes or self-employment tax. The AICPA will be closely monitoring any developments and keeping you up to date through its tax reform page and other communications.

Chris Hesse, CPA, Partner, CliftonLarsonAllen. Chris is with CliftonLarsonAllen’s Federal Tax Resource Group serving all offices of the firm. FTRG is a firm wide group that assists all offices of the firm on federal income tax matters, in addition to drafting CPE material for in-house presentation.  Chris is also chairman of the S Corporation Technical Resource Panel for the AICPA.

SC – Abandoned Buildings Rehab Tax Credit

 

Nowadays, it seems that most cities, both large and small, have become more focused on revitalizing their downtown areas. Here in Florence, SC, we have seen this first hand with the many projects that have been started in the downtown area.  This includes the recently opened hotel and restaurant which the City sees as a cornerstone to jump starting these revitalization efforts.  One of the many problems with revitalization is that it is usually expensive as developers work to try and balance the historical significance of an area with their need to provide more modern facilities that their new tenants will expect.  Fortunately, here in South Carolina, the State has enacted legislation that may help offset some of those costs.  The recently created credit for the rehabilitation of abandoned buildings may be the very thing which will attract the right kind of developers, allowing these revitalization programs to move forward.  The following article helps explain the credit, and its requirements, in more detail.

James Sheehy, CPA

Via CCH Tax Research:

State Tax Day – Current,S.33,South Carolina—Multiple Taxes: Credit Created for Rehabilitation of Abandoned Buildings,(Jun. 14, 2013)

Recently enacted South Carolina legislation creates a credit for taxpayers who rehabilitate qualified abandoned buildings against either (1) South Carolina corporate or personal income taxes, corporate license fees, taxes on building and loan associations, or a combination thereof, or (2) real property taxes levied by local taxing entities.

The taxpayer must incur the following expenses to qualify for the tax credit:

  • more than $250,000 for buildings located in the unincorporated areas of a county or in a municipality in the county with a population of more than 25,000;
  • more $150,000 for buildings located in the unincorporated areas of a county or in a municipality in the county with a population of at least 1,000, but not more than 25,000; and
  • more than $75,000 for buildings located in a municipality with a population of less than 1,000.

The credit applies only to abandoned building sites or phases or portions thereof put into operation for income-producing purposes. The construction or operation of a charter school, private or parochial school, or other similar educational institution qualifies for the credit. The construction of a single-family residence is not an income-producing purpose and does not qualify for the credit.

The credit provisions are repealed on December 31, 2019. Any carryforward credits will continue to be allowed until the five (income)- or eight (real property)-year time period is completed.

Income Tax Credit

To qualify for the income tax credit, the taxpayer must file a Notice of Intent to Rehabilitate before incurring its first rehabilitation expenses at the building site. The credit amount is determined as follows:

  • if the actual rehabilitation expenses incurred in rehabilitating the building site are between 80% and 125% of the estimated rehabilitation expenses set forth in the Notice of Intent to Rehabilitate, the credit amount is 25% of the actual rehabilitation expenses incurred at the building site;
  • if the actual rehabilitation expenses exceed 125% of the estimated expenses set forth in the Notice of Intent to Rehabilitate, the taxpayer qualifies for the credit based on 125% of the estimated expenses as opposed to the actual expenses it incurred in rehabilitating the building site; and
  • if the actual rehabilitation expenses are below 80% of the estimated rehabilitation expenses, the credit is not allowed.

The entire credit is earned in the taxable year in which the applicable phase or portion of the building site is placed in service but must be taken in equal installments over a five-year period beginning with the tax year in which the applicable phase or portion of the building site is placed in service.

Unused credit may be carried forward for the succeeding five years.

The entire credit earned may not exceed $500,000 for any taxpayer in a tax year for each abandoned building site. This limitation applies to each unit or parcel deemed to be an abandoned building site. Taxpayers that qualify for both this new credit and the credits allowed pursuant to the Textiles Communities Revitalization Act or the Retail Facilities Revitalization Act may only claim one of the three credits.

The credit is limited in use to 50% of either: (1) the taxpayer’s income tax liability for the taxable year if the taxpayer claims the credit as a credit against income tax, or taxes on associations, or both; or (2) the taxpayer’s corporate license fees for the taxable year if the taxpayer claims the credit as a credit against license fees.

A taxpayer may transfer any applicable remaining credit associated with the rehabilitation expenses incurred with respect to that part of the site to the lessee if the taxpayer leases the building site or part of the building site.

Taxpayers that are partnerships or limited liability companies taxed as a partnership may pass the credit through to the partners or members, and the credit may be allocated among any of the partners or members.

Local Property Tax Credit

To qualify for the credit against the local property tax, the taxpayer must file a Notice of Intent to Rehabilitate before incurring its first rehabilitation expenses at the building site.

Once the Notice of Intent to Rehabilitate has been provided to the county or municipality, the municipality or the county first will determine, by resolution, the eligibility of the building site and the proposed rehabilitation expenses for the credit.

A proposed rehabilitation of a building site must be approved by a positive majority vote of the local governing body. If the county or municipality determines that the building site and the proposed rehabilitation expenses are eligible for the credit, there must be a public hearing and the municipality or county will approve the building site for the credit by ordinance.

Before approving a building site for the credit, the municipality or county must first make a finding that the credit does not violate a covenant, representation, or warranty in any of its tax increment financing transactions or an outstanding general obligation bond issued by the county or municipality.

The local real property tax credit is equal to 25% of the actual rehabilitation expenses incurred at the building site multiplied by the local taxing entity ratio of each local taxing entity that has consented to the credit, if the actual rehabilitation expenses incurred in rehabilitating the building site are between 80% and 125% of the estimated rehabilitation expenses set forth in the Notice of Intent to Rehabilitate. If the actual rehabilitation expenses are greater than 125% of the estimated expenses set forth in the Notice of Intent to Rehabilitate, the taxpayer qualifies for the credit based on 125% of the estimated expenses as opposed to the actual expenses it incurred in rehabilitating the building site. However, if the actual rehabilitation expenses are below 80% of the estimated rehabilitation expenses, the credit is not allowed.

The ordinance must provide for the credit to be taken as a credit against up to 75% of the real property taxes due on the building site each year for up to eight years.

The credit against real property taxes for each applicable phase or portion of the building site may be claimed beginning with the property tax year in which the applicable phase or portion of the building site is first placed in service.

A taxpayer may not claim the credit if the taxpayer owned the otherwise-eligible building site when the site was operational and immediately prior to its abandonment.

Definitions

“Abandoned building” is defined as a building or structure, which clearly may be delineated from other buildings or structures, at least 65% of the space in which has been closed continuously to business or otherwise nonoperational for income-producing purposes for a period of at least five years immediately preceding the date on which the taxpayer files a Notice of Intent to Rehabilitate. For purposes of this credit, an abandoned building is not a building or structure with an immediate preceding use as a single-family residence.

However, any portion of the building or structure that was operational and used as a storage or warehouse for income-producing purposes does not qualify for the credit.

“Building site” is defined as the abandoned building together with the parcel of land upon which it is located and other improvements located on the parcel. However, the area of the building site is limited to the land upon which the abandoned building is located and the land immediately surrounding such building used for parking and other similar purposes directly related to the building’s income-producing use.

“Rehabilitation expenses” is defined as the expenses or capital expenditures incurred in the rehabilitation, demolition, renovation, or redevelopment of the building site, including, without limitations, the renovation or redevelopment of existing buildings, environmental remediation, site improvements, and the construction of new buildings and other improvements on the building site.

However, the definition does not include the cost of acquiring the building site or the cost of personal property located at the building site. In order for expenses associated with a building site to qualify for the tax credit, the abandoned buildings on the building site must be either renovated or redeveloped.

Rehabilitation expenses associated with a building site that increases the amount of square footage on the building site in excess of 200% of the amount of square footage of the buildings that existed on the building site as of the filing of the Notice of Intent to Rehabilitate will not be considered rehabilitation expenses for purposes of calculating the amount of the credit. Additionally, demolition expenses will not be considered a rehabilitation expense for purposes of calculating the amount of the credit if the building being demolished is on the National Register for Historic Places.

The “Notice of Intent to Rehabilitate” is a written letter, indicating the taxpayer’s intent to rehabilitate the building site. It must include the location of the building site, the amount of acreage involved in the building site, the amount of square footage of existing buildings involved in the building site, and the estimated expenses to be incurred in connection with rehabilitation of the building site. The notice must also set forth information as to which buildings the taxpayer intends to renovate and whether new construction is to be involved.

H.B. 3093, Laws 2013, effective June 11, 2013, applicable to tax years beginning after 2012.

Congratulations to Roy Burch on his retirement!

D31_7023RoyBack in 1973, a young graduate from the University of South Carolina joined the professional staff of Ernst & Ernst.  Thirteen years later in 1986, that same young man in that same firm, along with two other gentlemen, formed the firm of Burch, Oxner, Seale Co. and became its initial shareholders.  Over the years this man worked diligently to serve his firm’s clients, his profession and the public through his dedication and hard work.  This dedication and hard work led to a number of successes and achievements both personally and for his firm.  Some 27 years later, we find that same man has reached another milestone that every CPA one day hopes to achieve, their retirement from the profession.  Roy F. Burch, Jr. has been serving the public, the accounting profession, our firm, and most importantly our clients for the last 40 years.  His patience, consistency and perseverance over those 40 years has made it possible for this firm and our clients to flourish and prosper.  We take great pleasure in wishing Roy the best as he embarks on this new phase of his life.  We also pray that wherever he goes and whatever he does, good fortune will always be there with him and his family.

Payroll audits aimed at 1099 workers (via Wall Street Journal)

Small businesses need to know the rules on contract workers vs employees – ignoring the rules can be costly as this article from the Wall Street Journal points out:

Payroll Audits Put Small Employers on Edge

Tax Crackdown Comes as Use of Contract Workers Grows; Companies Find Rules Unclear

By ANGUS LOTEN And EMILY MALTBY

Internal Revenue Service auditors showed up with little warning at Brian Robinson’s staffing firm in Atlanta a year ago, seeking to verify that a dozen outside contractors he had hired to handle his information-technology services weren’t, in fact, full-time staffers.

The audit was part of a government crackdown on employers who misclassify workers as independent contractors to avoid paying payroll taxes, and other employment-related expenses.

TRC Staffing Services CEO Brian Robinson, right, says that the legal distinction between full-time staff and independent contractors can be very confusing for many employers.

Mr. Robinson says the auditors ultimately found that his 30-year-old family business, TRC Staffing Services Inc., with its 100 permanent employees and up to 20 temporary workers, was in the clear. But he says the audit was “nerve wracking” because tax law doesn’t make it easy to distinguish between full-time staff and independent contractors doing full-time work. He says the legal distinction can be confusing even for an employer with his decades of experience in the labor market.

The appeal of using outside workers is growing as many small businesses struggle to stay lean. Some employers also are turning to contractors to avoid hitting the 50-employee threshold that would require them to pay for employees’ health insurance, starting next year, under the federal health-care law, or pay a penalty.

Read the rest of the article at the Wall Street Journal website.

The IRS continues to delay accepting many 2012 tax forms before the filing deadlines, reports no problems accepting tax payments

On Friday, the AICPA raised concerns with the Internal Revenue Service about the ongoing delay in the agency’s ability to accept many tax forms and the problems that the compressed tax season is causing taxpayers and practitioners. The letter asked the IRS to clarify when it will be able to accept those delayed forms and requested that the IRS consider granting penalty relief for taxpayers affected by this tax season’s delays ( JournalofAccountancy.com 2/15)

AICPA raises concerns about delayed, compressed tax season   By Alistair M. Nevius, J.D. February 15, 2013

Jeffrey Porter, chair of the AICPA’s Tax Executive Committee, sent a letter to Steven Miller, acting commissioner of the IRS, on Friday raising concerns about the “very compressed and difficult filing season” AICPA members and their clients are facing, due to the ongoing delays in the IRS’s acceptance of certain tax forms.

In early January, the IRS announced a delayed, Jan. 30, start to the 2013 tax filing season, and it did not start accepting business tax returns until Feb. 4. The IRS also announced that, because of the need for extensive form and processing systems changes, many taxpayers would not be able to file returns until March.

The IRS published a list of forms that it would not be able to accept on Jan. 30. Currently, there are still 29 forms that cannot be filed because they must be updated and systems for processing them tested. The IRS has said it will start accepting returns that include these delayed forms in the first week of March, but has not given a specific date. In his letter, Porter expressed concern about the continuing delay in the release of these forms and asked the IRS to clarify when those forms will be available.

Business returns

Porter expressed to the IRS particular concern “about the impact the delays in forms releases will have on the processing of partnership, S corporation, C corporation and other business returns due on March 15.”

He noted that preparers may have only seven days to complete these returns, and he raised the issue of returns that require Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, an “extremely complicated” form that “it will be a challenge to complete the filing of” by the March 15 due date.

Individual returns

Porter also raised the issue of problems individual taxpayers are having with the delays—“particularly taxpayers who file one of the delayed forms or needs a Form K-1 from a flow-through entity in order to file their return.”

AICPA recommendations

Porter wrote that the AICPA wants to enter a dialogue with the IRS on three issues:

  1. Sec. 6651 failure to file and failure to pay penalties. The AICPA requests that the IRS “should instruct tax examiners to more readily accept grounds for reasonable cause relief if the taxpayer’s facts demonstrate that the challenges of this tax season caused the return’s delinquency”;
  2. Sec. 6654(e)(3) estimated tax penalty relief. The AICPA asks the IRS to consider granting estimated tax penalty relief based on the unusual circumstances surrounding this tax season and “for reasons of equity and good conscience”;
  3. Clarity in the release of tax forms. The AICPA requests the IRS to provide “more clarity about the timing for the release of the remaining tax forms.”

2012 American Taxpayer Relief Act – How will it affect you?

US_Capitol_BuildingAfter 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.

Individuals

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.

Businesses

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
Work Opportunity Tax Credit
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

Energy

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.

Looking ahead

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 our office. We can schedule an appointment to discuss how the changes in the new law may be able to maximize your tax savings.