California More Business Friendly with Tax Credit

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1 Tax Alerts April 2014 California More Business Friendly with Tax Credit The new California Competes Tax Credit is available to retain growing businesses in California and to attract out-of-state businesses to California. It is a negotiated tax credit awarded by a state committee through a competitive application process. Criteria include the number of jobs to be created or retained, the extent of poverty in the business area, the amount of total investment, and the commitment of the business owner(s) to stay and grow the business in California. There is no set formula for determining the amount of the credit awarded, but it will apparently be tied to the strength of the business plan and the economic benefit(s) the business creates. A total dollar pool is pre-determined ($30 million this year). Each year, 25% of the total pool is allocated to small businesses with gross receipts of less than $2 million, and no one single business will receive more that 20% of the total each fiscal year. Applications for the fiscal year 2013/2014 credit will be accepted until April 14, For questions or more information about the California Competes Tax Credit, please contact Susan Laptuz at slaputz@windes.com or Kim Rokicki at krokicki@windes.com or toll free at 844.4WINDES ( ). 1

2 Depreciation Dollar Limits for 2014 Business Autos, Light Trucks and Vans The Internal Revenue Service (IRS) has released the inflation-adjusted depreciation limits for business autos, light trucks and vans placed in service by the taxpayer in 2014, as well as the annual income inclusion amounts for such vehicles first leased in Depreciation deduction limits for 2014 are the same as in 2013 for a passenger auto, while most of the limits are $100 higher for a light truck or van. The bonus depreciation rules for additional first-year depreciation for autos, light trucks and vans, under which the regular first-year dollar limit for eligible vehicles was increased by $8,000, only applied to vehicles placed in service before January 1, As a result, for 2014, unlike 2013, there are not separate tables for vehicles that do and those that don't qualify for this additional depreciation. There are two sets of dollar limits for vehicles placed in service by the taxpayer in One is for passenger autos that are not trucks or vans and are subject to the luxury-auto limits under Internal Revenue Code Section 280F (they are rated at 6,000 pounds unloaded gross vehicle weight or less). The other is for light trucks or vans (passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis) that are subject to the luxury-auto limits (they are rated at 6,000 pounds gross (loaded) vehicle weight or less). Certain non-personal-use vehicles are exempt from the luxury auto limits regardless of their weight. The following are the annual depreciation dollar caps for vehicles that are subject to the luxury-auto limits and placed in service by the taxpayer in calendar year For an auto (not a truck or van): $3,160 for the placed-in-service year; $5,100 for the second tax year; $3,050 for the third tax year; and $1,875 for each succeeding year. For a light truck or van (passenger auto built on a truck chassis, including minivan and SUV built on a truck chassis): $3,460 for the placed-in-service year; $5,500 for the second tax year; $3,350 for the third tax year; and $1,975 for each succeeding year. For questions or more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 2

3 Internal Revenue Service (IRS) Releases 2014 Auto/Truck Maximum FMVs for Cents-per-mile Valuation The IRS has released the 2014 maximum fair market values (FMVs) for employer-provided autos, trucks and vans, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate (56 per mile for 2014). It also has released the 2014 maximum fleet-average vehicle FMVs for autos, trucks and vans for purposes of the annual lease value (ALV) fringe benefit valuation method. Maximum FMVs for cents-per-mile valuation of personal use. An employer must treat an employee's personal use of an employer-provided auto as fringe benefit income and value it using one of several methods. One of the permitted methods allows an employer to value personal use at the mileage allowance rate (56 per mile for 2014). However, this method may be used only if the auto's FMV does not exceed $12,800, as adjusted for inflation under Internal Revenue Code (IRC) Section 280F(d)(7). The inflation-adjusted figures for vehicles first made available to employees for personal use in 2014 are $16,000 for autos (same as for 2013) and $17,300 for trucks and vans-i.e., passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis-(up from $17,000 for 2013). Maximum FMVs for fleet-average ALV rule. Under the table value method, the fringe benefit value of an employee's personal use of a company-provided auto is found in a table in Treasury Regulation Section (d)(2)(iii). The employer determines the FMV of the auto, finds the dollar range in the table that corresponds to the FMV, and multiplies the ALV shown in the table for that FMV by the ratio of the employee's annual personal mileage of the auto to total annual mileage (employment-connected business driving plus personal driving). An employer with a fleet of 20 or more autos may determine the ALV of each auto in the fleet as if its FMV were equal to the "fleet-average value." This "fleet-average value" is the average of the FMVs of the autos in the fleet. The fleet-average valuation rule can't be used to compute the annual lease value of any auto whose FMV exceeds an annually adjusted inflation-indexed figure. Under Notice , the fleet-average valuation rule can't be used to determine the ALV of any vehicle if its FMV on the date it is first made available in 2014 for employee personal use exceeds $21,300 for a passenger auto (up from $21,200 for 2013) or $22,600 for a truck or van (up from $22,300 for 2013). If all other applicable requirements are met, an employer with a fleet of 20 or more vehicles consisting of passenger autos, as well as trucks and vans, may use the fleet-average valuation rule as long as none exceeds its respective maximum allowable value. For questions or more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 3

4 California New Manufacturing Exemption for Sales and Use Tax This article is sourced from the California State Board of Equalization. A new law allows certain businesses in manufacturing or in the fields of biotechnology or physical, engineering, and life sciences to purchase or lease manufacturing or research and development equipment at a reduced sales and use tax rate for purchases occurring on or after July 1, To be eligible for the manufacturing exemption you must meet all of the following conditions: Be primarily engaged in certain lines of business, also known as a qualified person which includes: Any form of manufacturing described in the North American Industry Classification System (NAICS) Codes 3111 to Research and development in biotechnology, physical, engineering, and life sciences described in the NAICS codes or Purchase qualified tangible personal property. Use that qualified tangible personal property in a manner qualifying for the exemption. Qualified tangible personal property generally includes: Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts and operating structures. Equipment or devices used to operate, regulate, or maintain the machinery, including but not limited to, computers, data processing equipment, and computer software. Tangible personal property used in pollution control that meets standards established by this state or any local or regional government agency within this state. Special-purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process or that constitute a research or storage facility used during those processes. Buildings used solely for warehousing after completion of the processes are not included. Qualified tangible personal property does not include: Consumables with a useful life of less than one year. Furniture, inventory, and equipment used in the extraction process, or equipment used to store finished products. Items used primarily in administration, general management, or marketing. The property must be purchased to be used primarily for the following uses: Manufacturing, processing, refining, fabricating, or recycling of tangible personal property. 4

5 California New Manufacturing Exemption for Sales and Use Tax (continued) Research and development. Maintaining, repairing, measuring or testing property listed above. By a contractor purchasing that property for use in the performance of a construction contract for the qualified person that will use that property as an integral part of the processes above, or as a research or storage facility for use in connection with those processes. Sellers If you make qualifying sales or leases, you must obtain a timely exemption certificate from the purchaser. You will be able to claim the deduction for sales subject to the manufacturing exemption on your sales and use tax return. Purchasers There is no need to apply to the Board of Equalization (BOE) for the exemption. When you make qualifying purchases, you must provide the seller with a timely exemption certificate to obtain the reduced tax rate. The BOE will make exemption certificates available in the forms section on our website by July If you make qualifying purchases and did not pay tax to the seller, you must report the use tax on your sales and use tax return. You may claim a deduction for purchases subject to the manufacturing exemption. Qualifying purchases cannot exceed $200 million in a calendar year per qualified person or combined reporting unit. The exemption will not apply if, within one year from the date of purchase, you use the property in a manner not qualifying for the exemption, you convert the property from an exempt use to a non-qualifying use, or you remove the qualifying property from California. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 5

6 Rep. Camp s New Tax Reform Proposal Would Eliminate MACRS & Make Other Business Tax Changes "The Tax Reform Act of 2014," proposed by House Ways and Means Committee Chairman Dave Camp (R-MI), would make a host of business tax changes. Among other things, the modified accelerated cost recovery system (MACRS) would be eliminated and depreciable lives for depreciation would be lengthened for property placed in service after December 31, 2015, and the 20% tax on minimum alternative taxable income of corporations would be repealed. The proposed Tax Reform Act of 2014 would repeal or modify many different deductions, credits, and other special treatment of various types of business income and expenses. Corporate tax rate. For tax years beginning after December 31, 2018, the maximum corporate tax rate would drop to 25% (from the current 35%). The decreased rate would be phased in. The maximum rate would be 33% for tax years beginning in 2015; 31% for tax years beginning in 2016; 29% for tax years beginning in 2017; and 27% for tax years beginning in For each of these tax years, the 25% rate would apply to the amount of the taxable income that does not exceed $75,000. The maximum corporate tax rate on net capital gain would be repealed. Personal service corporations would be taxed at the same tax rates as other corporations. Depreciation deduction. For property placed in service after December 31, 2016, MACRS would be replaced with the straight line depreciation method for tangible property with the applicable recovery period generally being the class life of the property. Fourteen recovery periods would be specifically assigned for certain types of property. For example, qualified technological equipment would be five years; automobiles and light trucks would be five years; and nonresidential real property and residential rental real property would be 40 years. Under the proposal, Internal Revenue Service (IRS) would be required to develop a schedule of class lives for all tangible property, except property with a specifically assigned recovery period. Taxpayers could generally elect to increase their depreciation deductions annually to take inflation into account. The inflation adjustment would be determined using the Chained Consumer Price Index for all Urban Consumers (C-CPI-U). Expensing deduction. For tax years beginning after December 31, 2013, a taxpayer could expense up to $250,000 of the cost of qualifying property placed in service for the tax year. The $250,000 amount would be reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds $800,000. Both amounts would be indexed for inflation for tax years beginning after For tax years beginning after 2013, the treatment of off-the-shelf computer software and qualified real property as eligible Code Section 179 property would be permanent. For amounts paid or incurred in tax years beginning after December 31, 2014, specified research or experimental expenditures (including for software development) would have to be capitalized and amortized over a five-year period, beginning with the midpoint of the tax year in which the specified research or experimental expenditures were paid or incurred. 6

7 Rep. Camp s New Tax Reform Proposal Would Eliminate MACRS...(continued) NOL deduction. In general, for tax years beginning after December 31, 2014, a corporation's net operating loss deduction would be limited to 90% of taxable income (determined without regard to the deduction). Carryovers to other years would be adjusted to take account of this limitation. In addition, various special carryback provisions other than the provision relating to certain casualty and disaster losses would also be repealed. Research credit. For amounts paid or incurred after December 31, 2013, the research credit would be made permanent. For tax years beginning after December 31, 2013, the traditional 20% research credit calculation method and the energy research credit would be repealed. The rate under the alternative simplified method for calculating the research credit would equal 15% of qualified research expenses that exceed 50% of the average qualified research expenses for the three preceding tax years. The rate would be reduced to 10% for a taxpayer with no qualified research expenses in any one of the three preceding tax years. The credit rate for the basic research credit would be reduced to 15%, and the base period would change from a fixed period to a three-year rolling average. Net earnings from self-employment. For tax years beginning after 2014, the tax imposed under the Self-Employment Contributions Act (SECA) on self-employment income would apply to general and limited partners of a partnership (including limited liability companies) and shareholders of an S corporation to the extent of their distributive share of the entity's income or loss. In determining net earnings from self-employment, they would be allowed a new deduction designed to approximate the return on invested capital. The effect of the deduction would be that partners and S corporation shareholders who materially participate in the trade or business of the partnership or S corporation would treat 70% of their combined compensation and distributive share of the entity's income as net earnings from self-employment (and thus subject to FICA or SECA, as applicable), and the remaining 30% as earnings on invested capital not subject to SECA. For partners and S corporation shareholders who do not materially participate in the trade or business (i.e., passive investors), the effect of the deduction would be that no amount would be treated as net earnings from self-employment. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 7

8 Ways and Means Chairman Camp Releases Long-Awaited Comprehensive Tax Reform Plan for Individuals As promised, House Ways and Means Committee Chairman Dave Camp (R-MI) has released his proposed tax plan, "The Tax Reform Act of 2014." Calling the existing regime "our broken tax code," and referring often to the accomplishments of the '86 Tax Reform Act, the plan aims to both simplify the tax laws and strengthen the economy. Reduce rates and collapse tax brackets. The Tax Reform Act of 2014 would collapse the existing seven tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) into three brackets of 10%, 25%, and 35%. The 10% rate would apply to single filers with taxable income below $37,400 and joint filers with taxable income below $74,800 (i.e., taxpayers in the existing 10% and 15% brackets). The 25% rate would apply to taxable income above these amounts. The 35% rate would begin at the same income levels as the current 39.6% bracket (i.e., above $400,000 for single filers and $450,000 for joint filers). However, the 35% would not apply to "qualified domestic manufacturing income" (QDMI; see below), which would be subject to a maximum statutory rate of 25%. QDMI generally would be net income attributable to domestic manufacturing gross receipts, which would include gross receipts derived from (1) any lease, rental, license, sale, exchange, or other disposition of tangible personal property that is manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the U.S., or (2) construction of real property in the U.S. as part of the active conduct of a construction trade or business. Puerto Rico would be considered "domestic" for these purposes, and other rules similar to those under current-law Code Section 199 would apply. Capital gains and dividends. The Tax Reform Act of 2014 would tax long-term capital gains and qualified dividends at the same rate that applies to ordinary income, but with 40% of gains and dividends excluded. Increased standard deduction. The Tax Reform Act of 2014 would provide an increased standard deduction of $11,000 for individuals and $22,000 for married couples (both indexed for inflation). The additional standard deduction for the elderly and the blind would be eliminated. The Joint Committee on Taxation estimated that the increased amounts would result in nearly 95% of taxpayers not having to itemize. Single filers with at least one qualifying child could claim an additional deduction of $5,500, regardless of whether or not they itemize deductions. Charitable deductions. The proposed increased standard deduction amounts are projected to decrease the number of taxpayers who itemize their deductions. For those who continue to itemize, the charitable deduction would be available under the Tax Reform Act of 2014 to the extent that contributions exceed 2% of income. It would also extend the deadline for making tax deductible donations for a given year to April 15 of the following year. Repeal of the AMT. The Tax Reform Act of 2014 would abolish the alternative minimum tax. 8

9 Ways and Means Chairman Camp Releases Long-Awaited Comprehensive Tax Reform (continued) Repeal of the personal exemption. According to the section-by-section summary, the personal exemption for the taxpayer and taxpayer's spouse would be repealed and consolidated into the larger standard deduction. The personal exemption for children and dependents would be consolidated into an expanded child and dependent tax credit (see below). Increase and expansion of child tax credit. The child credit would be increased to $1,500 and would be allowed for qualifying children under the age of 18, and a reduced credit of $500 would be allowed for non-child dependents (both indexed for inflation). The credit would be refundable to the extent of 25% of the taxpayer's earned income (earned income in excess of $3,000 before 2018). The credit would not begin to phase out until modified adjusted gross income (MAGI) exceeds $413,750 for single filers and $627,500 for joint filers. Elimination of deduction for state and local tax payments. The Tax Reform Act of 2014 would repeal the deduction for state and local income, property and sales taxes. This change would help to offset the repeal of the AMT. Changes to mortgage interest deduction. The Tax Reform Act of 2014 would gradually reduce the current $1 million cap on the amount of mortgage interest that can be deducted beginning with new mortgages taken out in 2015 such that the limit for mortgages taken out in 2018 or later would be $500,000. Homeowners would still be able to deduct interest on the first $500,000 of mortgage debt on a pro rata basis (i.e., a taxpayer with a $1 million mortgage could deduct half of his mortgage interest). Consolidation of education-related credits. The Tax Reform Act of 2014 would reduce the existing 15 tax breaks for higher education into five: the American Opportunity Tax Credit (AOTC) (which would be modified and made permanent see below), the deduction for work-related education expenses, the exclusion of scholarships and grants, gift tax exclusion for tuition payments, and tax-free 529 savings plans. The new AOTC would provide a 100% tax credit for the first $2,000 of certain higher education expenses and a 25% tax credit for the next $2,000 of such expenses. It would be available for up to four years of higher education, and eligible expenses would include tuition, fees and course materials. The first $1,500 of the credit would be refundable, and it would generally phase out for MAGI between $86,000 and $126,000 for joint filers and $43,000 and $63,000 for other filers. Reformed EITC. The Tax Reform Act of 2014 would reform the Earned Income Tax Credit (EITC) by making it a credit against actual employment (i.e., payroll and self-employment) taxes paid by or with respect to a taxpayer. The employee's share of payroll taxes would be offset by a credit against such taxes, while the employer's share would be rebated through a refundable income tax credit. Only taxpayers with at least one qualifying child could qualify for the credit against the employer's share of payroll taxes. For taxpayers without a qualifying child, the maximum credit amount would be $200 for joint filers ($100 for other filers). For taxpayers with one qualifying child, the maximum credit would be $2,400. For taxpayers with more than one qualifying child, the maximum credit would be $4,000 in the case of a joint return and $3,000 in other cases (all credit amounts indexed for inflation). Retirement savings. For future contributions, the Tax Reform Act of 2014 would allow up to $8,750 (half of the contribution limit) to be contributed either to a traditional or Roth account. Any contributions in excess of $8,750 would be dedicated to a Roth-style account, making these savings tax-free during retirement. The income eligibility limits for contributing to Roth IRAs would also be eliminated. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 9

10 FAQ: Does Tax Return Identity Theft Spike at the Start of the Filing Season? Yes. Identity theft is a growing problem and the start of the return filing season is one of the peak times for identity thieves filing fraudulent returns. Criminals file false returns early to get refunds and unsuspecting taxpayers are unaware their identities have been stolen until they file their returns. Individuals who believe they have been victims of identity theft should immediately alert their tax professional and the Internal Revenue Service (IRS). The IRS has a number of programs in place to assist victims of identity theft. Identity theft Identity theft has been the number one consumer complaint to the Federal Tax Commission for 13 consecutive years, and tax identity theft has been an increasing share of the FTC's identity theft complaints. In 2010, tax identity theft accounted for 15 percent of the FTC's identity theft complaints from consumers, while in 2011 it made up 24 percent of the overall identity theft complaints. In 2012, tax identity theft accounted for more than 43 percent of the identity theft complaints, making it the largest category of identity theft complaints. The IRS has reported similar growth in this troubling problem. Identity theft occurs when a criminal uses the personal information of another to commit fraud or other crimes. Personal information includes an individual's name, date of birth, Social Security number, bank account numbers, credit card numbers, personal identification numbers, and other identifying information. In tax identity theft, a criminal typically uses a taxpayer's identity to fraudulently file a tax return and claim a refund. The identity thief has obtained the taxpayer's Social Security Number and other personal information. As mentioned, identity thieves attempt to get a refund early in the filing season. The taxpayer discovers that a false return has been filed when he or she files a genuine return. IRS actions The IRS has set up a special Identity Theft Protection Specialized Unit. These employees are the first responders in assisting taxpayers whose identities have been stolen. The IRS will take a report, and request that the victim complete a special form (IRS ID Theft Affidavit Form 14039). This special form requires the taxpayer to briefly describe the events giving rise to the identity theft. The taxpayer also must provide proof of his or her identity by submitting photocopies of identifying documents, such as a passport, driver's license or other valid federal or state government-issued identification. The IRS is assigning special identity protection personal identification numbers (IP PINs) to victims of identity theft to use when filing their returns. An IP PIN is a unique six-digit number and is assigned annually to victims of identity theft. During the 2014 filing season, the IRS reported that it expects to provide more than 1.2 million identity theft victims with an IP PIN, up from more than 770,000 in Additionally, the IRS has overhauled its identity theft screening filters to spot suspected fraudulent returns before they are processed. After a suspected fraudulent return is flagged, the IRS will hold the return. If you receive a notice from the IRS, please contact our office immediately. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 10

11 New Sales and Use Tax Rates Effective April 1, 2014 This article is sourced from the California State Board of Equalization. The increased tax rates listed below apply within city limits. The tax rates outside of the city limits will remain the same. If you are not sure what the correct tax rate for your area is, you can find tax rates by address by going to our website at and selecting the Know Your Tax Rate link under Popular Topics. Area New Code New Acronym Old Rate New Rate City of Antioch 350 ANTG 8.500% 9.000% (located in Contra Costa County) City of Huron 352 HPST 8.225% 9.225% (located in Fresno County) Town of Corte Madera 354 CMGT 8.500% 9.000% (located in Marin County) City of Larkspur 356 LKSG 8.500% 9.000% (located in Marin County) Town of San Anselmo 358 SAGT 8.500% 9.000% (located in Marin County) City of San Rafael 360 SREF 9.000% 9.250% (located in Marin County)* City of Stockton 362 STKN 8.250% 9.000% (located in San Joaquin County) City of Scotts Valley 364 SVLY 8.250% 8.750% (located in Santa Cruz County) Current Tax Rates Extended Code Acronym Rate New End Date City of El Monte 222 EMGF 9.500% (located in Los Angeles County) City of Rohnert Park 262 RPGF 8.750% none (located in Sonoma County) *The rate increase of 0.50%, which began , expires , which decreases the rate to 8.50%. The new rate increase of 0.75%, effective , increases the total rate to 9.25%. For more information about this article, please contact our tax professionals at or toll free at 844.4WINDES ( ). 11

12 Windes is a recognized leader in the field of accounting, assurance, tax, and business consulting services. Our goal is to exceed your expectations by providing timely, high-quality, and personalized service that is directed at improving your bottom-line results. Quality and value-added solutions from your accounting firm are essential steps toward success in today s marketplace. You can depend on Windes to deliver exceptional client service on each engagement. For over 88 years, we have gone beyond traditional services to provide proactive solutions and the highest level of expertise and experience. The Windes team approach allows you to benefit from a wealth of technical expertise and extensive resources. We service a broad range of clients, from high-net-worth individuals and nonprofit organizations to privately held businesses and publicly traded companies. We act as business advisors, working with you to set strategies, maximize efficiencies, minimize taxes, and elevate your business to the next level. Headquarters 111 West Ocean Boulevard Twenty-Second Floor Long Beach, CA Orange County Office Von Karman Avenue Suite 1060 Irvine, CA Los Angeles Office 601 South Figueroa Street Suite 4950 Los Angeles, CA Windes, Inc. All rights reserved.