Archive for the ‘Tax Updates’ Category
Tax Planning for 2013 – Medicare Tax on Unearned Income
While we have a number of expiring tax provisions, we also have a few new ones. This one is courtesy of the 2010 Health Care bill (Obamacare) and it puts into place a medicare tax on unearned income which starts 1/1/2013. The tax rate is 3.8% and it’s on the lower of the persons’ net investment income or their modified adjusted gross income over a certain limit. Investment income includes interest, dividends, capital gains, annuities, royalties, rents and pass through income like income from K-1’s from S-Corporations and partnerships.
The modified AGI limits are $250,000 for married filing jointly and qualified widows or widowers, $200,000 for head of household and single tax payers and $125,000 if you file married filing separately. Finally, if you’re an employee and your salary is over those threshold amounts, you get hit with an additional medicare tax of 0.9% which brings it up to the tax on unearned income of 3.8%.
What’s interesting is they’re creeping into making S-Corporation income subject to payroll taxes. You have to be over the threshold but once you’re over, it makes the difference between a salary and a distribution a little bit less enticing.
Tax Planning for 2013 – The Payroll Tax Cut
Enacted in 2011, employees and self-employed people alike received a temporary 2% cut in their payroll taxes. Mired in Congress, the extension of this tax cut was given some odd treatment because the two sides of the aisle couldn’t agree on how to pay for it so for a while, there was just a two month extension. At the end of February, a full year extension was finally passed but as we get closer to the end of the year, it’s unclear what the fate of this tax cut is going to be.
If you’re an employee (of a company you don’t own), there’s not a lot you can do to plan. Either the cut will be extended and you’ll get or it won’t and you’ll see your pay check take a hair cut. For the self-employed who pay SE tax, you fate is about the same. If you’re an employee of your S-Corporation, there is a little bit you can do. In December, if the political winds are telling you that an extension isn’t going to pass, it might be a good time to push some salary (maybe a one time bonus or an advance) from 2013 into 2012. Other than that, this one is a big “wait and see.”
Rev. Proc. 2012-23 Spells Out 2012 Luxury Auto Depreciation Limits
With a new year we get new luxury automobile depreciation limits. You have code section 280F to thank for this one and you can find the new limits in Revenue Procedure 2012-23. For passenger auto’s, the 2012 limit is $11,160 if the bonus depreciation rules (168(k)) apply. For trucks and vans, the limit is $11,360. If the bonus depreciation rules do not apply, the limit for passenger cars is $3,160 and the limit for trucks and vans is $3,360.
Asset Purchases, Cost Segregation Studies and the Peco Foods Tax Court Case
Doing a cost segregation study could be a beneficial exercise for a company that owns real estate but the Tax Court recently dealt a blow to those looking at a cost segregation study on assets acquired in an asset acquisition. While usually more beneficial to the purchaser because the goodwill is amortizable for tax purposes, one of the exercises of an asset purchase is Form 8594 which basically makes you pool the assets purchased into buckets based on their character. The Form is then filed with both the seller’s and purchaser’s tax return.
Putting a little extra time into Form 8594 is even more important now because of the Peco Foods Tax Court Case. What the tax court determined was that the allocation done on Form 8594 is binding and that you’re not allowed to subsequently do a cost segregation study on the assets that were purchased. You’re not even allowed to elect a Change in Method of Accounting on Form 3115 to effectuate a change in the allocation so once the Form 8594 is done, you’re stuck.
The moral of the story is, take the extra time to get this allocation done and as much to your benefit as you can. You can usually work with the seller to get a solid allocation done that helps both of you so put in the extra time either during the negotiations or once the sale is getting close to being finalized because the final allocation could have ramifications for years to come.