Take Advantage of Expiring Tax Deductions Before Year End

Two tax deductions related to the purchase of equipment will expire on December 31, 2013.  If you expect to purchase business equipment in the near future, you should consider making the acquisition prior to December 31.

First year bonus depreciation provisions permit the immediate deduction of 50% of the cost of new equipment purchased, with no limits.  For example, a $2 million equipment purchase will result in an immediate $1 million tax deduction, with the balance subject to normal tax depreciation rules.

The Section 179 deduction  generally permits a dollar for dollar write off for their equipment purchases, subject to a $500,000 limit for 2013.  Absent action by Congress, this limit will drop to $25,000 for 2014.

To qualify for first year bonus depreciation or Section 179 expensing, the equipment must be placed in service.  Equipment ordered, but not placed in service on or before December 31 will not qualify for either deduction.

If your company does business in New Jersey, it is important to note that New Jersey does not recognize or permit any first year bonus depreciation, and limits the Section 179 deduction to $25,000 per year.  Compliance with these rules requires maintenance of separate New Jersey depreciation schedules for equipment for which Federal bonus depreciation or Section 179 expense in excess of $25,000 was taken.

The timing of equipment purchases should be part of your overall tax plan.  Regardless of these expiring provisions, tax and operating projections should be reviewed to determine the benefit of equipment purchases this year or in future years.  For example, if your company has taxable losses for 2013, or is a pass through entity with basis issues, it may be beneficial to wait until after December 31 to make the equipment acquisitions.

If you have any questions, please contact us.  Comments are welcomed.

How Will the Tax Changes Affect You?

With all the attention being paid to Obama Care and the recent government shutdown, no one is really talking about the tax increases taking effect this year.  If you haven't done 2013 tax projections, you should get right on it, or you may have an unpleasant surprise on April 15.  Following are the major changes effecting individual taxpayers.

In addition to the ordinary income tax rate increase to 39.6% for the highest income taxpayers, the top rate for capital gains and dividends increased from 15% to 20%.  Fortunately, capital loss carryovers may be used to offset capital gain income.

Married taxpayers with "Modified Adjusted Gross Income" over $250,000 may be liable for a 3.8% surtax on net investment income.  This surtax is on the lesser of net investment income or the amount by which MAGI exceeds a threshold amount.  The threshold amounts are $250,000 for married filing joint, $125,000 for married separate, and $200,000 for any other filing status.  The effect of this surtax can be taxation of long term capital gains at 23.8%, or as high as 43.4% for short term capital gains.  For long term capital gains, this represents a 60% tax increase from 2012 rates.

2013 also brings the introduction of the Additional Medicare Tax by adding .9% tax on covered wages in excess of threshold amounts.  The threshold amounts are identical to those set for the Net Investment Income Tax.   For example, a married couple will pay 1.45% on the first $250,000 of compensation plus 2.35% on the excess.  Unlike Social Security, there is no cap on this tax.

The so called "Pease Limitation" on itemized deductions of high income taxpayers is back for 2013.  This limitation reduces otherwise allowable itemized deductions.  The deduction for personal exemptions is also phased out for higher income taxpayers.

Prior to 2013, the itemized deduction for medical expenses was subject to a 7.5% floor, that is, expenses were deductible to the extent that they exceeded 7.5% of adjusted gross income.  For 2013, that floor has been increased to 10% of adjusted gross income.

While there is still time, you should review these changes and their effect on you.  Steps can be taken that may reduce your tax liability.  You should also review the status of your withholding and estimated tax payments to be sure that they are sufficient to avoid penalty.  Contact us if you have any questions or need assistance.

Taxation of Publicly Traded Partnership Investments

During the last tax filing season, we observed increasing popularity of investing in publicly traded partnerships.  The individual strategies varied from buy and hold to active trading.  Although these investments are easily bought and sold just like to shares in corporations, the record keeping and tax reporting is not nearly so simple, and the tax consequences of these investments are often misunderstood.

Much of the popularity of publicly traded partnerships is attributable to what are perceived as tax free distributions.  It is not until the partnership interest is sold that the investor realizes that the distributions are not tax free, but tax deferred and partially subject to ordinary income tax rates upon sale of the interest.  During this tax season, we had many conversations with clients who were shocked by the tax liabilities related to the sales of publicly traded partnership investments.

Tax reporting for sales of publicly traded partnerships is also more complex than reporting sales of shares in corporations.  For stock sales, the only reporting is of the date acquired and sold, and the purchase and selling prices, which are all reported on Schedule D and form 8949.  For sales of publicly traded partnerships, we must first perform an analysis of each sale to calculate the ordinary income and capital gain, and then report these gains on separate tax forms.  This process can be further complicated by multiple investments and dispositions of interests in the same partnerships, which requires more analysis and record keeping.

Many of our clients have been investing in publicly traded partnerships for years, holding the investments and selling when the time is right.  Others buy and sell like stocks.  This year, one client purchased and sold interests in 42 separate partnerships.  I don't understand this strategy.

Current estate tax laws provide that the basis of inherited property is the property's fair market value at date of death.  Because of this provision, a strategy to consider is to hold publicly traded partnership investments until death to obtain stepped up basis and avoid ordinary income recognition.

Please contact us if we can be of assistance.  Comments are welcomed.

Credit Card Reporting and Your Taxes

If your business accepts credit cards, the credit card companies are now required to report all of your credit card receipts to the Internal Revenue Service using form 1099-K.  The credit card companies are also required to send you a copy of this form.  In a recent conversation with an IRS auditor, I learned that the IRS is implementing a special project to investigate taxpayer whose tax return gross income does not make sense in relation to the gross receipts reported on form 1099-K.

For example, if you are in the restaurant business and your 1099-K reports $1,000,000 of credit card receipts and your tax return reports $1,050,000 of total income, you may run into a little problem with the IRS.  If that happens, and you are unable to convince them that all of your non-credit card receipts for the year are only $50,000, which is not very likely, your little problem may turn into a huge problem.

The moral of the story: be sure to accurately report all of your gross income, and provide copies of all 1099-K forms to your CPA.  Then, if you are selected for an IRS audit there will be no surprises.

Call us if we can help.

Law Firm Tax Alert

As states are forced to confront continuing budget shortfalls, they are looking for ways to increase revenue.  One of the easiest revenue sources is enforcement of existing tax laws, generally through audit of taxpayers.  Although the Technical Bulletin discussed here applies only to New Jersey taxpayers, we are seeing increasing audit activity in many states.

On January 15, 2013 the New Jersey Division of Taxation issued a Technical Bulletin (TB-69) on taxability of purchases made by lawyers and law firms. The fact that New Jersey issued this bulletin may be an indication that law firms will be the subject of increased audit activity.  Although lawyers practicing in New Jersey are not liable for collecting sales tax on charges for professional services, law firms located in New Jersey are required to pay sales or use tax on all purchases of taxable tangible property, specified digital products, and certain services used by the firm, unless otherwise exempt by law.

We have recently observed increasing New Jersey tax audit activity.  In a typical audit, little time is spent on income tax issues; the main focus of the audit is sales and use tax.  In such an audit, the auditor selects a single year, obtains and reviews copies of your business depreciation and cash disbursement schedules, and requires proof that sales or use tax was paid on each item on the depreciation schedule and selected items on the cash disbursement schedule.  Use tax, penalties, and interest are assessed for all taxable items where tax was not paid.  Based on the single year findings, sales and use tax liability is estimated and assessed for all other open years.   When penalties and interest are added on, the liability can be substantial.

The fact that a provider of a product or service does not collect New Jersey Sales Tax does not relieve the purchaser of the obligation to pay.  Examples of taxable products and services typically purchased by law firms include janitorial services, computer equipment, office furniture, office supplies, pre-written computer software, computer maintenance and service contracts, and detective and private investigation services for discovery purposes.  The bulletin and a full listing of taxable and tax-exempt products and services may be found at http://www.state.nj.us/treasury/taxation/pdf/pubs/tb/tb69.pdf