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Tax Planning in Today's Economy

Overview 

  • Hot Topics
  • Business Tax Provisions
  • Individual Tax Provisions
  • Potential Future Tax Law Changes
  • State Tax Considerations

Payroll Tax Audits to Begin 

  • The IRS expects to audit the payroll tax returns of 6,000 businesses over the next three years
  • Notices will start going out February 2010
  • All types of businesses will be scrutinized – S Corporations, Partnerships and Limited Liability Companies – in a wide variety of fields.
  • Agents will be on the lookout for employers that violate worker classification rules as well as the tax rules for executive pay and fringe benefits.
  • The IRS has been adding more bulk to its audit force. Expect more audit due to this added bulk.

Independent Contractor vs. Employee 

  • Facts and Circumstances Test
  • Employee (W-2): An individual generally is an employee if the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it.
  • Independent contractor (1099-Misc): Everyone else
  • Big Issue because of related payroll taxes
    • Withhold federal income and payroll taxes
    • Pay social security, unemployment and Medicare
    • Provide fringe benefits
     
  • Government assumes everyone is an employee unless they can be proven otherwise.
  • Multiple Factor Test:
    • Does the worker comply with instructions about when, where, and how he or she is to work?
    • Does the business hires supervise and pay assistants for the worker?
    • Is there a continuing relationship between the worker and the business?
    • Is the worker required to perform services in a specific order or sequence?
    • Does the employer supplies the worker with significant tools, materials, and other equipment, or ordinarily pays the worker's business and/or traveling expenses?
     

Sales & Use Tax 

What is Sales Tax?

  • Generally, this tax is usually levied on the sale or transfer of tangible personal property ("TPP") or certain enumerated services.
  • Collected by the seller

What is Use Tax?

  • A tax on the receipt, possession, consumption, storage, or use of property
  • All jurisdictions that have sales taxes have enacted use taxes to "complement" or cover transactions where no sales tax is collected

Sales & Use Tax Transaction Scenarios 

  • Example 1: If Mr. Seller, whose only location is in State A, sells TPP to Mr. Buyer, a resident of State B, and the transfer of that TPP takes place in State A, Seller is obligated to collect sales tax from Mr. Buyer and remit it to State A.

     
  • Example 2: If, instead, Mr. Seller ships the TPP to State B, via common carrier (UPS, FedEx, etc.), Mr. Seller is not obligated to collect sales tax from Mr. Buyer. Why? The transfer of TPP takes place in State B. Since Seller has no connection (or nexus) in State B, he has no obligation to collect and remit the sales tax to State B.
  • Example 3: Same facts as Example 2. Since Mr. Seller is not obligated to collect sales tax from Mr. Buyer, Mr. Buyer is off the hook, correct? Wrong. Since no sales tax was charged to Mr. Buyer, Mr. Buyer is obligated to charge himself use tax.

     

Pitfalls of Sales & Use Tax

Limit Exposure

  • Review out-of-state purchases
  • Self-assess use tax and report to state
  • If no use tax is owed, still file respective states’ form reporting “NONE” for the amount assessed. This will limit the amount of time the state can audit the forms. If no forms are filed the statute of limitations does not run.

Review nexus sales tax rules when selling into other states.

American Recovery and Reinvestment Act of 2009

Business Taxpayer Provisions  

§179 – Expensing of Fixed Assets  

  • Deduction of $250,000 and phase-out threshold of $800,000 through 2009.
  • Qualified Property includes: Tangible Personal Property (i.e. machines, desks) and Non-customized computer software
  • Must be placed in service during 2009
  • Taxable income limitation
  • Taken before Bonus Depreciation
  • Many states do not follow federal amounts

Bonus Depreciation 

  • 50% first-year deduction for property through 2009
  • Qualified Property includes: MACRS life 20 years or less and must be original-use
  • Must be placed in service during 2009
  • No taxable income limitation
  • Many States have decoupled
  • Cost Segregation Study when constructing a new building

New Business Provisions - New COBRA rules 

  • Those eligible - Involuntarily separated – 9/1/08 – 1/1/10.
  • Government ultimately covers 65% of insurance premiums
  • Extremely technical in nature and time sensitive..
  • The former employer will receive a credit against income tax withholding and payroll taxes it is otherwise required to remit to the Federal government.

Individual Taxpayer Provisions  

AMT Patch 

  • Raises exemption for 2009 - $46,700 ($70,950 MFJ). Phase out at $112K to $300K ($150K – 433K MFJ)
  • Keep 26 million taxpayers off of AMT. Save family of 4, with income of $125K, ~$3K

First Time Homebuyer Credit 

$8,000 Credit/No payback if held for 36 mos.

  • Effective 1/1 – 11/30/09
  • MFS limited to $4,000
  • No ownership in past 3 years (Easy to check)

Previous law - $7,500, 4/8/08 – 7/1/09, payback over 15 years

  • No retro treatment for 2008 purchases

Credit phase-outs at $75K to $95K($150K to $170K MFJ)

Election to treat 2009 purchase as 2008

New Car Deduction 

  • Above the line deduction
  • Equal to the Sales or Excise Tax on vehicle
  • Limits
    • For first $49,500 of car value (Weigh <8.5K LBS)
    • Phase-out is $125K to $135K($250K - $260K MFJ)
    • Must be new vehicle
    • Effective dates are 2/17/09 to 12/31/09
     
  • Applies to domestic/foreign cars
  • Is applied on a per vehicle basis

§529 Plans 

  • 2009 & 2010 distributions from §529 plans will be tax-free when used to pay for computers and computer technology, including internet access.
  • Contributions to §529 are considered gifts for gift tax purposes
  • Can give up to $13,000 ($26,000 MFJ) per recipient in gifts tax free in 2009
  • Special gift tax rule allows a $65,000 contribution ($130,000 MFJ) in 2009. However, then you are unable to make tax-free gifts to the recipient for the next 5 years. ($13,000 x 5 = $65,000)

Roth Conversions 

  • 2010 Roth Conversion tax spread out over 2 years, 2011 & 2012
  • No income limitation for 2010
  • Top tax bracket filers may want to pay all of the tax in 2010 because the top rate will likely go from 35% to 39.6% after 2010
  • Facts and circumstances test whether it is right for you.

Retirement Plan Contributions 

  2009  2010 
401(k) 16,500 16,500
Catch-up 5,500 5,500
SIMPLE 11,500 11,500
IRA 5,000 5,000
IRA – Catch-up 1,000 1,000



Note: No required retirement plan distributions for 2009 for individuals age 70½ and older.

 

Residential Energy Property Tax Credit 

  • Increases the credit from 10% to 30%
  • Raises the maximum cap to a $1,500 aggregate amount for 2009 & 2010 installations
  • Eliminates the $500 lifetime cap
  • Qualified Property: Energy efficient building property that meet the specific energy efficiency standards (Electric heat pump, natural gas, propane or oil furnace or hot water heater, central air conditioner.)
  • Other energy incentives are available, including credits for electricity produced from renewable sources such as wind and for plug-in electric vehicles.

LOOKING FORWARD 

Likely Tax Changes in the Senate Finance Health Reform Bill 

  • 40% nondeductible excise tax would be levied on health coverage in excess of $8,000 for single ($21,000 for family) coverage, effective for tax years beginning after 2012
  • Employers would be required to report the value of health benefits on employees’ W-2s, effective for tax years beginning after 2009
  • The definition of medical expenses deductible as a medical expense would generally be conformed to the definition for purposes of the itemized deduction for medical expenses (for purposes of employer provided health coverage, HRAs, FSAs, HSAs, and MSAs)
  • Penalty for nonqualified HSA distributions would be increased from 10% to 20% (effective for disbursements made during tax years beginning after 2010)
  • Allowable contributions to health FSAs in cafeteria plans would be capped at $2,500 (effective for tax years beginning after 2010)
  • The floor beneath itemized deductions would be raised from 7.5% of adjusted gross income (AGI) to 10% (effective for tax years beginning after 2012)
  • The deduction for expenses allocable to Medicare Part D subsidy would be eliminated (effective for tax years beginning after 2010)

Potential Future Legislation - Businesses 

Bonus depreciation likely to be continued beyond 2009.

Possible expansion of loss carryback rules - $15 million limit may be increased and the longer carryback period may be extended to cover 2009 operating losses.

  • 2008 Small Business NOLs were able to be carried back 3, 4, or 5 years.
  • As the odds of a tax rate increases on high income individuals improve you may want to reconsider the form of your business.

Potential Future Legislation - Individuals 

  • Target the “rich” = income>$250,000 (Singles = $175K)
    • Top rates going from 33% and 35%-> 35% & 39.6%
    • Increase cap gain/dividend rates to 20%
    • Limit itemized ded/exemptions for “rich”
     
  • AMT reform
    • Indexing rate brackets and exemption to inflation
    • Allow personal exemption/standard deduction
     
  • 1st time homebuyer credit extension for a few months is likely. Clarification on the details is also expected.
  • Possible expansion of the credit to buyers who’ve owned a home for 5 of the last 8 years. Would apply to homes purchased after enactment.
  • Extension of unemployment benefits
    • An extra 14 weeks
    • An extra 6 weeks available for state with a jobless rate exceeding 8.5%
    • Will be paid for by an extension of the 0.2% federal unemployment surtax for one year, through 2010.
     
  • Popular tax breaks will be extended through 2010:
    • State sales tax deduction
    • College tuition deduction
    • Tax exclusion of up to $2,400 in unemployment compensation and tax free IRA payouts to charity
     

Potential Future Legislation - Estate Planning 

  • 2010 looming [Congress may “patch” it if no agreement by YE]
  • Estate and gift exemptions are likely to remain
    • $3.5 M for Estate Exemption
    • Lifetime Gift - $1M
    • Top rate 45%
     
  • Portability of spouse’s unused estate exemption
  • Allowing discount values for active businesses only
  • Change to Carryover basis provisions [likely if exemptions increased]

State Tax Considerations – NJ Businesses 

  • 4% Surtax on CBT Liability is extended for 1 year, applies to periods ending before July 1, 2010 (2009 calendar corporations)
  • Beginning on or after July 1, 2010 (2011 calendar corporations):
    • Throwout Rule for CBT is eliminated
    • Regular Place of Business Requirements are eliminated
     

State Tax Considerations – NY MCTMT 

  • Enacted as part of the MTA funding legislation
  • Tax is .34%
  • Imposed on:
    1) Employers required to withhold NY state income tax from employee wages and whose payroll expense exceeds $2,500 in any calendar quarter
    2) Individuals with net earnings from SE allocated to the MCTD that exceed $10,000 for the tax year. Includes partners in partnerships and members of a LLC treated as a partnership
  • 1st Estimate Filing was due November 2

State Tax Considerations - Individuals

New Jersey – Property Tax Deduction Changes

  • $250,000 < Gross Income, Not Eligible for Property Tax Deduction
  • $150,000< Gross Income ≤ $250,000, $5,000 Property Tax Deduction
  • Above is for persons who are not age 65 or older or allowed a personal exemption as a blind or disabled person

Individual Tax Increases

  • NJ Individual Tax – Gross Income Tax State
    • that is greater than $400,000 and less than $500,001 increased from 6.37% to 8%
    • that is greater than $500,000 and less than $1,000,000 increased from 8.97% to 10.25%
    • that is greater than $1,000,000 increased from 8.97% to 10.75%
     
  • NY Individual Tax -2 top brackets increased after 2009-2010
    • $300,000 to $500,000 - 7.85% (Joint)
    • Over $500,000 - 8.97% (Joint)
     
Contacts:
Sarah Anderson, CPA, MST
Phone:908.218.5002  X2235
Barbara Peña, CPA, MST, MAcc
Phone: 908.218.5002 X2337

 

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