Tax Items For Businesses Ohio Tax Law Changes

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1 FRUSH & ASSOCIATES, INC. OVERVIEW Recap of 2013 ACA Act NII Surtax Medicare Wage Surtax Tax Items For Businesses Ohio Tax Law Changes

2 Circular 230 Disclosure Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors

3 Last Time We Met.. O The FISCAL CLIFF included the potential onset of federal tax increases and spending cuts (scheduled to take effect January 1, 2013) that could have a substantial impact on the economy. O Was estimated up to 90% of Americans would have a tax increase.

4 Where We Were Bush-era tax rates of 10%-35% Dividends (qualified) taxed from 0%-15% Long-term capital gains taxed from 0%-15% Estate tax higher exemption/ lower rate No marriage penalty Tax-advantaged depreciation options Phase-outs and credits

5 Bush Tax Cuts Extended.With A Kicker 2012 Brackets 10% 15% 25% 28% 33% 35% 2013 Brackets 10% 15% 25% 28% 33% 35% 39.6%*

6 Dividends Ordinary: Up to 35% Ordinary: Up to 39.6%* Qualified: 0-15% Qualified: Up to 20%*

7 Capital Gains Short-Term: Up to 35% Short-Term: Up to 39.6%* Long-Term: 0-15% Long-Term: 0-20%*

8 ACA Tax Provisions * The Affordable Care Act of 2010 introduced tax provisions relating to health care, and also snuck in a couple new taxes

9 Schedule of New Health Care Provisions Year Provision 2013 Flexible spending arrangement the maximum drops to $2,500 per plan year New HI (hospital insurance tax) on high-income taxpayers New 3.8% Medicare tax on investment income Medical care itemized deduction threshold increases to 10% of AGI starting in 2013 (except from ) 2014 States will be required to provide federally approved insurance plans Premium assistance credit Excise tax on uninsured individuals Excise tax on applicable large employers (moved to 2015) Insurer reporting requirements Eligible premiums included in cafeteria plans 2017 Increase in medical deduction threshold for taxpayers age 65 and over 2018 Excise tax on high-cost employer plans 9

10 ACA Tax Provisions Beginning with 2012, employers are required to report the cost of coverage on the employee s W-2, Box 12 (informational only) Employer contribution continues to be not taxable to the employee Net Investment Income Tax Additional Medicare Tax

11 ACA Tax Provisions Small Business Health Care Tax Credit Helps small businesses and small tax-exempt organizations afford the cost of covering their employees Specifically targets those with low- and moderate-income workers Designed to encourage small employers to offer health insurance coverage

12 ACA Tax Provisions Small Business Health Care Tax Credit Small Employer Fewer than 25 FTE Average wage less than $50,000/year Pay at least half of single (not family) employee health insurance premiums

13 ACA Tax Provisions Small Business Health Care Tax Credit For 2010 to 2013 maximum credit is 35% of premiums paid for small employers For changes to: Maximum credit is 50% of premiums paid To be eligible, must pay premiums on behalf of employees enrolled in a qualified health plan offered through a SHOP Credit available for 2 consecutive taxable years

14 ACA Tax Provisions Small Business Health Care Tax Credit Even if did not owe tax, can carry unused credit back or forward to other years Can claim expense for premiums in excess of the credit Can file an amended return if you forgot to claim originally File Form 8941 to calculate include as general business credit on return

15 ACA Tax Provisions Employer Shared Responsibility Payment Transition relief provisions moved compliance to 2015; encourage voluntary compliance in 2014 PCORI - $1 fee per number of lives covered for plan years ending before October 1, 2013 $2 per covered life 10/1/13-9/30/14 File on Form 720 Quarterly Excise Tax Return for 2nd Quarter following plan year end

16 Net Investment Income Surtax Beginning with 2013 tax year, imposes a 3.8% surtax to all taxpayers whose income exceeds a certain threshhold amount Theoretically a taxpayer in the 39.6% tax bracket could have a marginal rate of 43.4%

17 NII Surtax The surtax applies to the LESSER of: Net investment income - or Excess of Modified Adjusted Gross Income over applicable threshold amount Threshold amounts: Single, HOH - $200,000 MFJ - $250,000 Trusts/Estates - $11,650 (top bracket)

18 NII Surtax Net Investment Income (NII) includes: Interest Dividends Annuity Distributions Rents Royalties Income from Passive activities Capital Gains

19 NII Surtax Net Investment Income (NII) does not include: Salaries and Wages Active business income IRA Distributions. 401(k) Distributions Self-Employment income Gain on sale of active partnership or S Corporation interest Tax-exempt interest Social Security and Veterans benefits

20 NII Surtax Example: John is single and has an MAGI of $220,000. He has interest and dividends of $40,000. John s surtax base is the lesser of: NII - $40,000 MAGI over threshold - $220, ,000 = $20,000 John pays a surtax of $760 ($20,000 x 3.8%)

21 NII Surtax Interest Some interest may be excluded if earned in a trade or business Ordinary course of business Not trading of financial commodities Individual not a passive investor Example dentist earns income on extra cash in a money market not excluded because not in the ordinary course of business

22 NII Surtax What is a Passive activity? Regulations under Section 469 automatically assume you don t really participate in some activities Puts the burden of proof on you to prove otherwise Must prove you materially participate Passive income is included in both sides of the NII calculation

23 NII Surtax Proving material participation 7 tests Participate > 500 hours per year 2. Participation constitutes substantially all of the participation by all involved in the activity 3. Participation more than 100 hours, and no one participates more 4. Significant participation over 100 hours in the activity, and total participation in all significant activities over 500 hours 1.

24 NII Surtax Proving material participation 7 tests 5. Materially participated in activity for any 5 of previous 10 tax years 6. Personal service 3 previous tax years 7. Generic facts and circumstances After proving material participation, need to go back to exclusion test mentioned before to determine if you can exclude income.

25 NII Surtax Example: Joe and Dan are 50/50 shareholders in an S Corporation and make widgets. Joe works 2,000 hours per year, Dan sits on the beach doing nothing. The company earns $1,000,000 of ordinary income during the year, allocated evenly to each. The company also earned $100,000 in interest from its money market account. What does each include in their NII?

26 NII Surtax Answer Joe excludes his $500,000 share of income because it meets the exclusion tests. He includes his $50,000 share of the interest income. Dan includes his $500,000 share of income in the NII base because he does not meet the exclusion tests. He includes his $50,000 share of the interest income also.

27 NII Surtax Owners with multiple companies IRS recognizes you may not be able to meet the 500 hour requirement Can group together multiple activities to test and prove material participation on a combined basis Restrictions on types that can be grouped together Once you elect to group, no turning back IRS allowing changes to prior groupings if subject to NII only

28 NII Surtax Rentals IRS automatically assumes rentals are passive under 469 therefore included in NII Real estate professionals with material participation in the rental activity can claim active participation REP More than half services you perform during year must be in real estate activities Perform more than 750 hours of real estate services in which you materially participate Can elect grouping Each rental must be trade or business (new)

29 Minimizing the NII Surtax Need to evaluate ways to minimize both NII and AGI in order to minimize the surtax Spread income over multiple years Shift taxable investment income into taxexempt bonds Harvest capital losses to offset future gains Maximize timing of Roth conversions

30 Minimizing the Surtax Rents received by Real Estate Professional who materially participate in the rental activities are not part of NII Evaluate passive business interests that are subject to the surtax Installment sales Above-the-line deductions

31 Medicare HI Tax Under current law, all workers pay 1.45% of their wages to the Medicare hospital insurance program (employers match) Self-employed taxpayers pay both Starting in 2013, high income taxpayers will owe an additional.9% on wages or selfemployment income Employers do not match the additional.9%

32 Medicare HI Tax Tax applies to: Married filing joint wages or selfemployment income over $250,000 Single, HOH - $200,000

33 Medicare HI Tax Self-employed taxpayers Pay the additional.9% over threshold Since the.9% is technically the employee s portion, the additional tax in not an abovethe-line deduction on Form 1040

34 Medicare HI Tax Married taxpayers Employers have no way of knowing the wages or income of an employee s spouse, so most employers will begin withholding as if their employee is single (after reaching $200,000) If both spouses are high income earners but under $200,000 each, may need to make estimated payments due to no withholdings Excess withholdings are considered surplus withholding

35 Minimizing Medicare HI Tax Maximize deferrals to employer plans (reduces federal taxable wages) Request employer withhold extra withholding

36 Planning For Businesses Businesses seeking to maximize tax benefits through 2013 year-end tax planning should consider two general strategies: Use timing techniques for income and deductions Consider significant tax incentives set to expire at the end of 2013 (bonus depreciation, Section 179, WOTC) Take into consideration the new higher tax rates when planning for 2013 and beyond.

37 Section 179 This has been one of the biggest business friendly items over the past decade For 2013, the annual dollar limit for expensing is $500,000 Annual investment limitation is $2,000,000, after which expensing limit reduced dollarfor-dollar over $2,000,000 For 2014 and beyond, limits revert back to pre-bush tax cut amounts of $25,000 and $200,000, respectively.

38 Section 179 Qualifying property is new and used depreciable property purchased for use in active trade or business For 2013, off-the-shelf computer software is included; not included in 2014 and after For 2013, qualifying real property is included. QRP includes qualified leasehold improvements, qualified restaurant property and qualified retail improvement property

39 Maximizing Section 179 Expense property that does not qualify for bonus depreciation (i.e. used property) Expense assets with longer depreciation periods

40 Bonus Depreciation Qualified property is new, depreciable property under MACRS with a recovery period of less than 20 years Must be placed in service prior to 1/1/14 Bonus depreciation is 50% of cost of the property, regardless of when the property is placed into service No expensing limit Elect per asset class Scheduled to expire for 2014 and after

41 Maximizing Bonus Depreciation Compare using bonus depreciation versus Section 179 for maximum tax effect Electing bonus depreciation in a loss year, allows future deductions in years where income may occur Can wait until time to file the return to make a decision to elect

42 Final Repair/ Capitalization Regs In September 2013, IRS released regs designed to assist owners in determining when they must capitalize costs, and when they can deduct costs for acquiring, maintaining, repairing and replacing tangible property Begin for tax years after 1/1/14 Can apply rules for by filing amended returns

43 Other Planning Considerations Enter into/ sell installment contracts Defer/ receive bonuses before January Hold/ sell appreciated assets Delay/ accelerate billable services Delay/ accelerate payments for services

44 Ohio Tax Update H.B. 59 signed June 30, 2013 Personal Income Tax Rates will drop 10% (8.5% for 2013,.5% 2014, 1% 2015)

45 Ohio Tax Update Small Business Income Deduction 50% of the first $250,000 of business income (which is Ohio apportioned income that passes through a K-1 or Schedule C) So can receive up to $125,000 deduction, resulting in potentially $6,000-$7,000 in tax savings on your Ohio return

46 Ohio Tax Update Sales and Use Taxes State rate increased to 5.75% effective 9/1/13 Taxing videos, magazines, music that are acquired electronically

47 Ohio Tax Update Real estate eliminated property rollbacks on new and replacement levies. Existing levies and renewals keep the rollbacks. Eliminates homestead exemption for those over 65 earning more than $30,000. Those that already qualify are grandfathered in.

48 Ohio Tax Update Commercial Activity Tax (CAT) Phase-out the $1MM exemption for larger businesses on or after 1/1/14 Taxpayers in different brackets will pay at least a minimum amount Annual filers must now file electronically

49 Ohio Tax Update Credits Technology Investment Tax Credit - new credits eliminated; existing credits with allowable carryforwards may continue within 15 year period InvestOhio - $100,000,000 available from 7/1/13-6/30/15. Must hold the investment for five years. Used to be two years.

50 THANK YOU! Chad W. Frush, CPA Office (614) Cell (614) Follow us on