CPA With a View

Frank is here

My new grandson Frank James was born on Feb. 17. Frankie is awesome. A beautiful 8.5 pound baby boy. Another tax accountant in the family. He received his first tax code on Feb. 18.

That makes 8 grandchildren; all under seven years old. What a blast. We were lucky enough to keep Frankie’s two sisters (Cami and Kiera) and his brother (Vinny) at our house while mom was delivering the new guy.

What a fantastic weekend.  Nothing better than family.

The Green Book is Out

The U.S. Treasury Department released the “General Explanation of the Administration’s Fiscal Year 2013 Revenue Proposal” (The Green Book-because it has a green cover). It is 200 pages of the Obama Administration’s proposal for changes in the tax law in 2012 and beyond.

A few of the proposals are highlighted below: 

• A tax credit for increased wages paid to employees.
• 100% bonus depreciation for 2012.
• Payroll tax reduction extension to the end of 2012.
• For years after 2013, repeal LIFO and lower-of-cost-or-market inventory valuation methods. LIFO reserves would be picked up in income over a 10-year period.
• Tax LLC and Partnership “profits interests” issued for services as ordinary income.
• Provides a variety of tax incentives for generating business and jobs in the U.S. and tax disincentives for transferring business and jobs outside the U.S.

Individual Tax Proposals beginning in 2013:

• Increase the highest-two tax brackets of 33% and 35% to 36% and 39.6%, starting when income equals $250,000 for a joint return and $200,000 on a single taxpayer’s return.
• Tax a portion of dividends at ordinary tax rates for high-income taxpayers.
• Increase long-term capital gains from 15% to 20% and add the Buffet Tax explained in my last BLOG post.
• Start itemized deduction and exemption phase-outs for high-income taxpayers.
• Limit the rate in which itemized deductions reduce taxes to 28% of the deduction for certain high-income taxpayers.

Estate and gift tax proposals:

• For taxpayers who die after 2012, the estate and gift tax rules would basically be what was in effect in 2009.  A 45% tax rate with a $3,500,000 Estate Tax and Generation-Skipping Transfer (GST) Tax  exclusion amount per person. Portability among spouses of the exclusion amount would still apply. The lifetime gift tax exclusion would be limited to $1,000,000. Currently, the exclusion amount for Estates, GST and gifts is $5,000,000 and tax rate is 35%.
• GRATs (grantor retained annuity trusts) would be required to have at least a 10-year term and generate some value in the remainder interest.
• New rules would greatly reduce the estate tax benefit of using Grantor Trusts, by coordinating the income tax and estate treatment of such trusts. This is a big deal.

The Green Book is truly a wish list by the Administration. Whether any or all of the items get enacted, will rest with the make-up and direction of Congress, after the election.  

We will see. It will be fun being involved in the process.

Fair Share Tax

The Paying Fair Share Act of 2012 (S-2059) was introduced to the Senate and referred to the Finance Committee by U.S. Senator Sheldon Whitehouse (D-RI) on February 1, 2012.

The goal of the bill is to reduce the deficit by imposing a minimum effective tax rate for high-income taxpayers.

The bill would add Section 59B to the Internal Revenue Code.  If it becomes law, it would be effective beginning in 2013.  It applies to individuals with adjusted gross income in excess of $1,000,000.  This includes all income, for example S-corporation or LLC pass-through income, and capital gains, including gains from the sale of one’s business.

The tax is basically a flat tax of 30% of total adjusted gross income less charitable contributions. The tax would be offset by certain self-employment taxes and payroll taxes incurred by the taxpayer, including the special Medicare taxes that become effective in 2013, pursuant to the 2009 Health Care Bill.

The tax is structured as a second additional minimum tax. The additional tax is the excess of the total tax under Section 59B; less the taxpayer’s regular tax and additional alternative minimum tax (AMT); and less certain credits and payroll taxes mentioned above. The additional amount is phased in for taxpayers with adjusted gross income between one and two million dollars. The full additional amount applies if one’s adjusted gross income is $2,000,000 or more.

For example, assume a taxpayer sold his/her business in 2013 and recognized a $3,000,000 capital gain and also had $400,000 of other ordinary income. In addition, assume itemized deductions for taxes, home interest and charitable deductions ($200,000) equaled $400,000.  In this example, the person’s regular and AMT tax would be approximately $475,000. Under the the Paying Fair Share Act there would be additional taxes of $365,000, calculated as follows:

$3,000,000 less $200,000 (charitable contribution) times 30% equals $840,000. Reducing the $840,000 by the regular and AMT tax of $475,000 results in the Section 59B fair share tax of $365,000.

What a hit for a small business owner who took major risks and created jobs over the years. You judge the fairness. You know my thoughts.

The good news is the S-Corporation Association is aware of the bill.  The Association understands how it impacts small business, especially flow-through entities like LLCs and S-Corporations, and will be working to educate Congress on the impact of this provision.

Also, based on my conversations with contacts in Washington, D.C., it doesn't seem likely this type of legislation could pass with the current make-up of Congress and the fact that it is an election year.  It truly seems to be a political play.  That's too bad.

More to come.

Caribbean

My wife and friends are back from the sailing trip in the Caribbean. Sounds like I should have joined them, relaxing and sailing for a week.  At least I got to walk my dog in the freezing cold in Minnesota four times a day.  There is always next year.

Extension of the Payroll Tax Holiday

The House of Representatives agreed to pass the Senate version, with a slight modification, of the Bill to extend for two months (thru 2/29/12) the current 2% reduction in payroll taxes. The House and Senate will ratify it and the President is expected to sign it today.

The new House bill corrects the Senate provision by allowing employers to withhold employee payroll taxes at the 2% reduced rate of 4.2% on all compensation paid from 1/1/12 to 2/29/12, subject to the full Social Security tax wage base ($110,100). Consequently they can ignore the $18,350 cap (two-twelfths of the wage base of $110,100) on compensation eligible for the form 1/1/12 to 2/28/12 included in the Bill.

If an employee’s wages during the first two months of 2012 exceed $18,350, an amount equal to 2% of those excess wages would ultimately be recaptured on the worker’s individual tax return for 2012. 

This rule would only apply if the payroll tax reduction is not extended to the end of 2012 in the upcoming conference committee sessions expected to convene soon in order to negotiate a full-year extension or other 2012 legislation.

In other words, they aren’t done yet. Can’t wait to watch it unfold. 

Merry Christmas.

Payroll Tax Extension

As many of you may know, the House and Senate are fighting over how to a pass an extension of the payroll tax cut.  If they come to an agreement, I will submit a short post. 

Merry Christmas

My son is home from the military.  I look forward to spending time with him over the next week.  I will not be posting again until 2012, unless there is news out of Congress relating to the payroll tax extension.  Hope everyone has a Merry Christmas.

Rumors on Gift Tax Law Changes

Unofficial comments are being made all over the Internet and the press that the Congressional Super Committee, in charge of the debt ceiling and deficit reduction project, may recommend reducing the 2011 and 2012 $5,000,000 lifetime gift tax exclusion back to the 2009 level of $1,000,000 effective November 23, 2011.  This is the date they are required to report their recommendation.

Hard to believe this may happen, but who knows. Anyone contemplating large gifts in 2011 and 2012 should talk to their advisors ASAP and monitor the committee’s action and press releases.

This is Congress back at making planning impossible. I will post any updates as they are released.

The ESOP/S Corporation Structure May be Perfect

I attended the Employee-Owned S Corporations of America (ESCA) Annual Event in Washington, D.C. this week.  ESCA's purpose is to protect, improve and encourage the ESOP/S Corporation structure. Check out their website at http://www.esca.us/.

I love attending the event.  It reminds me how great the structure is and what good it does for a company's stakeholders, especially employees.  I should not have to be reminded, the accounting firm I am part of is an ESOP/S Corporation.

Background:  An ESOP (Employee Stock Ownership Plan) is a qualified retirement plan required to invest primarily in the stock of the company establishing and sponsoring the ESOP. Many times such stock is the only investment held by the plan.  The plan is subject to the rules applicable to most retirement plans in the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA).  In addition, both the IRC and ERISA have special rules only applicable to ESOPs.  In most situations the plan does not pay tax on income earned from its investments.  It is tax exempt under IRC Section 501.  An S Corporation is a U.S. corporation that elects to be taxed under Subchapter S of the IRC. Subchapter S provides that the income earned by the corporation is not taxed to the corporation, but is allocated (not necessarily distributed) as income taxable to the shareholders. The allocation is based on each shareholder’s percentage ownership. To the extent the shares are owned by an ESOP, its allocation of the income is not taxed, because, as mentioned above, ESOPs don't pay tax on the income earned by its investments.

What an awesome situation if all the stock is owned by the ESOP.  No tax on the corporation’s income. A great incentive for employee ownership.

Sounds like a loophole. It’s definitely not. The participant will pay income tax on all distributions they receive from the ESOP, which includes the value created by the corporation's retained income.  No corporate tax and taxation when the ESOP accounts are distributed is consistent with the single tax structure for all S Corporations.

The real beauty of the structure is that it is one of the few things that Congress passed 1) with bi-partisan support, and 2) that works. The laws creating the structure were passed in 1997 and 1998.  President Clinton was in office and Congress was controlled by Republicans.  I was there and participated in the process.  It had significant bi-partisan support.

The structure allows businesses to retain more profits to create jobs and value for the employee owners. The ESOP is created and funded by the company, not from the employees’ paychecks. It provides retirement security for employees for generations and reduces their reliance on social security.  Studies show that ESOP companies are more productive and the owner employees have larger retirement plans than non-ESOP companies. Check out the website of NCEO at http://www.nceo.org/ for more information on these studies.

ESCA has been instrumental in helping craft and get legislation introduced to further promote the ESOP/S Corporation. The most recent of which is The Promotion and Expansion of Private Employee Ownership Act (H.R. 1244 and S. 1512) which was introduced to the U.S. House of Representatives earlier this year and was introduced to the U.S. Senate this week.  The bill includes four provisions that expand the benefit of the ESOP/S Corporation structure.

These provisions will:

• Encourage S Corporations to sell their stock to an ESOP, by allowing IRC Section 1042 tax deferred sales to apply to sales to ESOP/S Corporations
• Expand financing opportunities for the ESOP/S Corporation structure
• Provide added technical assistance from the Department of the Treasury relating to the ESOP/S Corporation structure
• Allow certain ESOP/S Corporations to maintain Small Business Status with the SBA

You can see a copy of the bill on our website or Google it "H.R. 1244 2011"

I believe every business, especially those going through the business succession process, should seriously look at the ESOP/S Corporation structure.  It may meet the needs and goals of both the current owners and employees.  It can't hurt to go through the exercise of looking at the feasibility of the structure for a company.

Tax accountant inside, not outside

My day was made in Washington, D.C.  I was having a drink in the Corner Bar, near the Treasury Department and White House, and met a lobbyist, Judy.  We talked about my reason for being in Washington, D.C. which was promoting ESOP/S Corporation tax legislation. We talked about her favorite tax code change, the Tax Reform Act of 1986 (a game changer for tax shelters). After chatting a while about taxes, lobbying and my favorite band the Rolling Stones, she stated that I sure didn't come across as a tax accountant.  That made my day.  Although one of my favorite things to do on this earth is to read tax code, regs, articles, rulings and cases etc. (i.e. be a tax guru nerd), I would hate to get picked out of a "guess his profession" line up as the tax geek.  Based on my ½ hour talk with Judy, I think I am okay for now.

 

Debt Deal Joint Committee to Consider Tax Changes

On August 2, the Budget Control Act was signed into law by President Obama. Many refer to it as the "debt deal". It creates a joint House Senate panel to recommend how to deal with reducing the deficit. Tax changes or reform may be part of their recommendation.

There have been various proposals by the President and members of both chambers of congress related to such tax changes.  It appears the major tax changes under consideration based on the debt ceiling debate are as follows:

 INDIVIDUALS

• Three tax brackets 8%, 14% and 23%.
• Reduce or remove the preferential treatment of long-term capital gains and dividends.
• Repeal the alternative minimum tax.
• Reduce the deduction for home mortgage interest, charitable contributions and medical expenses.
• Repeal deductions for taxes and miscellaneous investment and employee expenses.

 BUSINESSES

• Lower the top corporate tax rate to around 23%-28%.
• Reduce or repeal certain key deductions like the domestic production deduction, accelerated depreciation, LIFO inventory method and certain oil and gas industry special deductions.
• Switch from a worldwide system, where U.S. businesses pay U.S. tax on all income and get a credit for foreign taxes, to a territorial system, where U.S. businesses only pay U.S. tax on income earned in the U.S.

Most commentators believe these provisions will be considered but no major tax changes would be brought by the committee to congress for a vote. However, with last Friday’s downgrade of U.S. credit by Standard & Poor’s, this may change. Who knows, we may get some tax changes this year.

I will monitor this and write more as things develop.

Heading to Fort Bragg

Booked tickets for me and my wife to head to Fort Bragg in August to see our son. He is an Army Ranger in special forces training (Green Beret). We are excited to see him.

I admire and respect all our service men and women. I enjoy such a wonderful life because of them.

My wife's and my thoughts and prayers go out to the families of the troops and marines who lost their life this weekend in Afghanistan protecting our freedom.

Expanded 1099 Reporting May be Repealed

A bill to repeal the expanded 1099 information reporting requirements from 2010 health care reform passed the House and Senate and is waiting for the President’s signature.  Without a repeal businesses would be required to file 1099 Forms for annual purchases above $600.  The bill also repeals the rule treating certain real estate rental activities as trades or businesses for 1099 reporting rules. Keeping up with this reporting requirement would be a heavy burden for businesses, especially small businesses.  It is not a done deal. President Obama is concerned with the revenue raiser offsets included in the repeal bill.  I will inform you when or if the bill is signed by President Obama.

Corporate Tax Reform Update and Impact on Manufacturing Industry

Corporate tax reform continues to be a hot topic in Washington, D.C.  Last week, the Wall Street Journal (click here to read) published an article on Ways and Means Committee Chairman Dave Camp’s (R-MI) position on tax rate reform.  He announced his support for tax reform that would lower the highest corporate and individual tax rates to 25%.  Similar to other proposals, the lowered rates would be paid for through the elimination of current deductions and credits.  The deductions being discussed may negatively affect manufacturing companies.  Click here to read an article I recently wrote discussing the potential impact on manufacturers.

It’s crucial for manufacturing companies to stay up-to-date on current proposals to be prepared.  It will be fun watching the debate on tax reform.  I will continue to send updates on changes.

Summer is around the corner

I just spent two days with my wife and friends, the Lees, at the house boat show. They tried as hard as they could to talk me into a new boat. Regardless of their great effort, I was able to hold off.  It was tough. The boats are incredible.  The show did get us all excited for the ice to melt and to get back out on the river.  It is so relaxing to sit on the river and study.

President's FY 2012 budget proposals include many tax proposals

On February 14, the President issued his FY 2012 budget proposals, accompanied by the Treasury's release of its “General Explanations of the Administration's Fiscal Year 2012 Revenue Proposals” (the Green Book). There are many changes for businesses, individuals and investors. Many of the proposed changes were in the last two (FY 2010 and FY 2011) Green Books. Some of the proposals are highlighted below:

• Expanding the research credit by nearly 20% and making it permanent.
• Repealing the use of the LIFO inventory accounting method. Taxpayers currently using this method would be required to write up their beginning LIFO inventory to its FIFO value in the first tax year beginning after Dec. 31, 2012. This one-time increase in gross income would be taken into account ratably over ten years, beginning with the first tax year beginning after Dec. 31, 2012.
• Taxing a partner's share of income as ordinary income on an “investment services partnership interest” (ISPI) in an investment partnership, regardless of the character of the income at the partnership level. The partner would have to pay self-employment taxes on such income; and gains recognized on the sale of an ISPI would generally be taxed as ordinary income, not as a capital gain. In general, an ISPI would be defined as a carried interest in an investment partnership when held by a person who provides services to the partnership. These changes would apply for tax years beginning after Dec. 31, 2011.
• Barring a deduction for punitive damages.  If the liability for punitive damages is covered by insurance, such damages paid or incurred by the insurer would be included in the gross income of the insured person. These changes would apply to damages paid or incurred after Dec. 31, 2012.
• Repealing the lower-of-cost-or-market inventory accounting method, and the subnormal goods method, effective for tax years beginning after Dec. 31, 2012.
• Repealing the additional 1099 reporting requirements imposed by the Health Care Act, but requiring businesses to file 1099s for payments for services of $600 or more in a year to corporations. 1099 reporting would not be required for payments for property. These changes would be effective for payments made after Dec. 31, 2011.
• Eliminating tax preferences (e.g., expensing of intangible drilling costs, enhanced oil recovery credit, production tax credit for marginal wells, percentage depletion) for oil, gas and coal companies.
• Replacing  current deduction for energy efficient commercial building property with a more generous and effective tax credit to encourage building owners to retrofit properties.
• Reforming the current credit for purchasers of electric vehicles.  Allowing dealers to claim the credit with clear transparency requirements to ensure the benefit of the credit is passed on to consumers.
• Making permanent the Section 179 write-off rule allowing up to $125,000 to be expensed. Under current law, the maximum expensing amount is $500,000 for tax years beginning in 2010 or 2011, dropping down to $125,000 for tax years beginning in 2012, and then falling to $25,000 for tax years beginning after 2012.
• Making permanent the rule excluding all gain on qualified small business stock.
• Beginning in 2013, allowing the 2001 and 2003 tax cuts to expire for households making more than $250,000 per year and limiting the tax savings for itemized deductions for high-income families to 28%.
• Making the American Opportunity Tax Education Credit permanent.
• Increasing tax credits for child care and dependent care expenses, and permanently expanding the Earned Income Tax Credit for families with 3 or more children.
• Providing for “Automatic IRAs” in the workplace.  Giving employers who automatically enroll their employees in IRAs tax credits of up to $250 a year for two years.
• Beginning in 2012, eliminating required minimum distributions for taxpayers with aggregate IRA and tax favored retirement plan account balances of $50,000 or less.  Effective for taxpayers attaining age 70-1/2.
• Beginning in 2012, allowing a surviving non-spouse beneficiary to make 60-day rollovers from a retirement plan or IRA to a non-spousal inherited IRA.
• Changing estate and gift taxes to 2009 levels.  A $3,500,000 estate exclusion; a $1,000,000 lifetime gift tax exclusion; and a 45% estate and gift tax rate.

What is clearly missing from the proposal is corporation tax reform. The President mentioned it in his State of the Union Address, but it is nowhere to be found in the Green Book. Many still believe corporate tax rates will be lowered and the taxable income base will broaden this year, I’ll keep you updated.

February 13 was even a bigger day

Mick Jagger performed at the Grammys for the first time ever.  A little older (67), a little slower, a little grayer, but still dancing and rocking. Definitely the best lead singer and performer in Rock and Roll history. I hope the Stones tour one last time. I will be there.