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Reminder: Ohio Offers R&D Credit on CAT Tax

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This is a reminder to our clients and contacts who are preparing their fourth quarter Commercial Activities Tax (CAT tax) return due Friday, February 10, 2012. The Ohio CAT tax allows a non-refundable credit for research and development (R&D) expenses. Similar to the reporting of gross receipts for the CAT tax, the credit is calculated on a calendar year basis, regardless of the taxpayer’s fiscal year.

The credit available is equal to 7% of the excess of the average of the prior three years’ R&D expenses. Ohio’s definition of R&D expense is the same as the federal and generally includes amounts paid for wages, supplies and 65% of amounts paid to outside research firms.

Example:
Taxpayer has $1.25 million in qualified R&D expenses in calendar-year 2011. The client had R&D expenses of $1 million in 2010; $795,000 in 2009; and $500,000 in 2008. For its 2011 CAT tax returns, the client can claim a non-refundable credit of $33,950. This is calculated as $ 1.25 million minus the three-year average of $765,000, multiplied by 7%.

Don’t worry if you don’t have your 2011 R&D expenses quantified by the February 10th deadline. You will have the option to amend the fourth quarter return at a later date in order to capture the credit.

For more information, contact Tracy Monroe at tmonroe@cohencpa.com or a member of your service team.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.


Making the "Work Opportunity Tax Credit" Work for Employers Hiring Veterans

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The IRS recently issued guidance on the work opportunity tax credit (WOTC) regarding amendments made to the credit last fall. Below is an update on how employers can take advantage of the WOTC specific to the hiring of qualifying veterans. In addition to the criteria listed below, veterans must be hired from November 22, 2011 through December 31, 2012 to qualify.

  • Veterans with a service-connected disability. This category of veterans is eligible for the highest amount of WOTCs. Employers may qualify for a tax credit of 40% of qualified wages up to $4,800 for veterans hired with a service-connected disability. For those veterans with a disability who also have been unemployed for at least six months, an employer may qualify for a tax credit of 40% of qualified wages of up to $9,600.
  • Veterans without a service-connect disability. Veterans unemployed for at least four weeks qualify employers for a tax credit of 40% of qualified wages up to $2,400. Those veterans unemployed for at least six months qualify employers for a tax credit of 40% of qualified wages up to $5,600.
  • Qualified tax-exempt organizations. Organizations such as 501(c)s that hire qualified veterans are eligible to apply for the credit, if the above qualifications have been met.
  • Transitional relief. Most employers are required to submit form 5580 to claim the WOTC; tax-exempt organizations must submit form 5884-C. All employers hiring qualifying veterans on or after November 22, 2011 and before May 22, 2012 have until June 19, 2012 to submit their form(s) to the appropriate state agency. For veterans hired after May 21, 2012, employers have 28 days to submit.
  • Verification. State workforce agencies will certify veterans as meeting the required periods of unemployment based on receipt of unemployment insurance compensation. The website below has a link to each state’s work opportunity credit coordinator.

More detailed information on the WOTC and PDFs of the required forms can be found at the U.S. Department of Labor website at http://www.doleta.gov/business/incentives/opptax/employer.cfm. Or contact a member of your service team with additional questions.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

Payroll Tax Cut Extended Through 2012

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Congress has extended the 2% cut in Social Security taxes, effective through December 31, 2012. The extension will allow employees to continue paying 4.2% up to $110,100 in wages earned; self-employed individuals will continue to pay 10.4% up to $110,100. The employer contribution towards Social Security will remain at 6.2%. President Obama is expected to sign the measure by the end of the month.

Contact a member of your service team to discuss specific issues.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

Window Closing on Unprecedented Tax-Free Gifting Opportunity

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The Tax Relief, Unemployment Insurance Reauthorization and Job creation Act of 2010 (Act) unified the estate, gift, and generation skipping tax (GST) exemptions and increased the exemption amounts to an unprecedented $5.12 million ($10.24 million, including a spouse). Through December 31, 2012, an individual can make lifetime gifts up to these amounts without paying any tax. However, absent congressional action, as of January 1, 2013, this opportunity will be lost and exemptions will revert to $1 million.

The Significance

Historically, the lifetime gift exemption, i.e., the amount that an individual can pass onto heirs during his or her lifetime without the imposition of any gift tax, has never been this high. Even for those who have already used their $1 million exemption, the Act created a fresh $4.12 million opportunity to lower future estate taxes. It also provides an individual with the satisfaction of seeing children and grandchildren enjoy the fruits of their labors during their lifetime.

From a planning perspective, not only can an individual remove the current value of the assets gifted from the estate, but all future appreciation on those assets that would have otherwise been potentially subject to estate taxes is also successfully transferred to heirs. Strategically, the best assets to consider gifting are those that have the highest opportunity for future appreciation and those not critical to an individual’s lifetime financial security.

Next Steps

While this enhanced exemption poses an excellent opportunity, there are issues to consider. Not everyone will be able to take full advantage of this planning opportunity; and the senior generation’s lifetime financial security is certainly top priority. Additionally, no one can predict if Congress will decide to extend this enhanced exemption beyond December 31, 2012.

However, based on the information currently available, it may be worth evaluating whether it makes sense to take advantage of this unique planning opportunity. Given the complexities surrounding the transfer of large amounts of wealth, we encourage you to begin a discussion now with a member of our estate planning team so we can comprehensively evaluate your situation and execute accordingly.

To review your individual situation and evaluate whether a shift in your gifting strategy makes sense, contact Alane Boffa at aboffa@cohencpa.com or a member of your service team.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

Foreign Account Reporting Due; Renewed Chance for Amnesty

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As we have been reporting over the past few years, the IRS continues to focus on taxpayers’ overseas activities, including foreign bank and financial account information. The IRS believes there is a significant lack of reporting in these areas, namely with the filing of the Foreign Bank Account Report (FBAR).

Who must file an FBAR?

Generally, any U.S. person with a financial interest in, or signature or other authority over any foreign financial account with an aggregate value exceeding $10,000 at any time during the year must report certain information to the U.S. Department of Treasury. The information is reported annually by filing Form TD F 90-22.1 no later than June 30th of the following year.

So who qualifies as a "U.S. person" and what is a "financial account" for reporting purposes? A U.S. person includes a U.S. citizen or foreign person who is considered a resident alien for U.S. tax purposes. It also includes U.S. corporations, partnerships, trusts and estates, among others. A financial account includes a securities, brokerage, savings, demand, checking, deposit or other account maintained with a financial institution. It also includes a commodity futures or options account, an insurance or annuity policy with a cash value, and shares in a mutual fund or similar pooled fund. The term “foreign account” simply means an account located outside of the United States.

What are the penalties for not filing?

A U.S. person who fails to report information on overseas financial accounts can be subject to penalties up to $10,000 per violation. Worse yet, willful failures can result in penalties of up to $100,000 or 50% of the highest balance in the account, whichever is greater. In more extreme circumstances criminal penalties could apply.

What if I have prior year unreported income from undisclosed foreign accounts?

The IRS is offering yet another Offshore Voluntary Disclosure Program that will allow certain taxpayers with undisclosed foreign accounts to “come clean” and catch up on prior filings. This program is available to taxpayers who have undisclosed offshore accounts or assets and who did not report the related taxable income.

Those qualifying for the program will be subject to a penalty of 27.5% of the highest aggregate value of the foreign account during the eight full tax years prior to the disclosure. This penalty can be reduced in certain circumstances. In addition, the program requires that participants 1) file all original and amended tax returns, 2) include payment for back taxes and interest for up to eight years and 3) pay any accuracy related and/or delinquency penalties. The program is currently scheduled to remain open for an indefinite period.

What if I have properly reported all my foreign account income but have not filed the required FBARs? The Department of Treasury has indicated that, in this scenario, the Voluntary Disclosure Program is not appropriate. Rather, taxpayers should file the prior reports and include an explanation as to why these were not previously filed.

What if I only recently learned that I should have been filing FBARs because I have signature authority over bank accounts owned by my employer?

The Department of Treasury has indicated that the Voluntary Disclosure Program is also not appropriate in this situation. Rather, you taxpayers should file the prior reports and include an explanation as to why these were not previously filed.

For more information on FBAR filing or other international issues, contact Ray Polantz at rpolantz@cohencpa.com or a member of your service team.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

How the Supreme Court’s Health Care Ruling Will Impact You

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The U.S. Supreme Court has upheld the requirement of the Patient Protection and Affordable Care Act (PPACA or Act) that mandates individuals to obtain health insurance by 2014 or pay a penalty. The Supreme Court’s “green light” of this core provision also sets in motion other significant tax and reporting provisions that will greatly impact employers and employees. Below is a brief summary of the most immediate requirements to consider:

  • Beginning with 2012 W-2 reporting forms issued in January 2013 -- Employers must report the cost of employer-provided health coverage. This requirement applies to most employers with more than 250 employees. Effective January 1, 2013 -- Individuals making more than $200,000 per year ($250,000 and up for married filing jointly) will incur an additional .9% Medicare surcharge. Employers will be responsible for withholding the amount from employees.
  • In addition to the Medicare surcharge on wages and self-employment income from partnerships, a 3.8% Medicare surcharge will apply to the unearned income of any individual making over $200,000 per year (family income of above $250,000). Unearned income includes rents, royalties, capital gains, interest and dividends. At this time, income from S Corporations will not be subject to the surcharge. Effective January 1, 2013 -- Medical device manufacturers will be subject to a 2.3 percent excise tax on the sales of their devices.
  • There are many additional, significant insurance issues included in the PPACA that employers must analyze and sort through before the Act takes full effect in 2014. Does becoming self-insured make sense? Are HSAs a viable option? What about state-based insurance exchanges? Cohen & Company’s Healthcare Consulting Group will provide additional guidance in the coming months to help employers navigate as efficiently as possible.

For more information on the tax implications of this ruling, contact Tracy Monroe at tmonroe@cohencpa.com or a member of your service team.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

Always Say Never - A Message from our CEO

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Posted by Randy Myeroff, CPA, President & CEO

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill
 

At Cohen & Company, we definitely fall on the side of the optimist. But we like to think we elevate Mr. Churchill’s concept to a bold new level. (No offense, Mr. Churchill.) We strive to help our clients seize every opportunity.

Now, we know that sounds bold. And opportunity can mean a lot of things. It can mean interpreting tax law to help our clients minimize their taxes and maximize their cash flow. It can mean building a deeper relationship with our clients by helping them strategize for growth. Or it can mean partnering with our clients to help those in the community who really need it.

Our firm has spent 35 years carefully crafting an "opportunity-based culture." And we believe we’ve proven ourselves up to the task. Just ask our clients (happy to provide names if you’re looking).

So we are more than excited to introduce new opportunities to engage with you, such as our new website, this blog, social media and other creative means of communication you will see from us in the coming months. In particular, we hope you make this blog your central resource for the latest in technical and business insights.

“Never Miss an Opportunity” is much more than a tagline to us. This is who we are and what all of us should expect from our service providers. Welcome to Cohen & Company’s new “Never Miss” blog. Looking forward to talking with you soon!

 


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.


 

Lessons Learned: Preparing for Tax Season ‘13

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Posted by Tracy Monroe, CPA, MT

We take much of what we learned from last tax season with us as we prepare for the season ahead. I thought I would share a few of the most common themes that stood out for me and will continue to inform our discussions with you during the late months of 2012 and into early 2013.

  1. A challenging time. This statement is not only true for business owners and individuals, but also for accountants. Together, we all faced, and are still facing, multiple short-term tax opportunities. The temporary nature of these opportunities makes planning challenging, to say the least. At the end of 2011, we lost the R&D credit, even though each year for the past 30 or so it has been retroactively reinstated and may again. Bonus depreciation on the purchase of new equipment is scheduled to disappear at the end of 2012. Uncertainty and short-lived changes to the tax code make it difficult to plan for the long-term. In addition to strategic challenges, the constantly shifting tax landscape often moves too quickly for technology. Even the most sophisticated tax preparation and projection software cannot keep up—leaving many practitioners manually entering new deductions and credits, and analyzing projections versus actual the “old-fashioned way.” So much for the efficiencies promised by technology.

  2. Participate in your advocacy. We’re always on your side and want to help you take advantage of as many business and personal tax opportunities as possible. In addition to our proactive advice, the best way to take advantage is to stay informed. Use our hot topic email alerts to spark questions and discussions with us. We proactively bring you ideas, but we believe it’s equally important to educate our clients, because you know your business or individual situation better than anyone. So don’t wait until December or, worse yet, March to get involved. Take advantage of the resources our firm provides—in terms of information and engaged advisors. Talk with us early about maximizing your opportunities. And, as a general reminder, the simplest way to be involved is to review the returns we prepare for you before you sign!

  3. Never let down your guard. This reminder became even more apparent to me this past tax season. At Cohen & Company, we hire and continually train the best in the profession. I believe that to be absolutely true. But we are not the only players in the system that will impact your return. Most of us often work with IRS agents, legal and other advisors important to our clients. Understandably, not everyone makes it their mission to stay up on the very latest changes in the tax code. That just means that we, as your tax advisors, need to remain sharper and more diligent than ever to remain at the forefront of tax knowledge and to stand ready to defend what we know to be right for our clients.

  4. Onward and upward. So what now, as we approach the next tax season (which is how accountants actually track the passing of time)? The best general advice I can give is to take advantage of everything possible throughout 2012. Don’t wait it out to see how political regimes may or may not change. Tax reform is coming, but we just can’t know when and to what degree. Bonus depreciation on the purchase of new equipment remains a solid opportunity through 2012. There’s a significant opportunity to use the reunified $5 million estate, generation-skipping tax (GST) and gift exemption through 2012, and there are many other opportunities that may apply to your specific situation.

One final note: for more than 24 tax seasons, I have found that the most fruitful opportunities come from meaningful interaction with my clients. A good conversation will always be the genesis of a good idea — and a great partnership!

To talk about your upcoming tax season opportunities, contact Tracy Monroe at tmonroe@cohencpa.com or a member of your service team.

 


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

 


New 1099 Q&A from the IRS: What Are the Right Answers?

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Posted by Laura White, CPA 

Did your business make any payments that would require it to file Form 1099?
If yes, did your business file, or will it file, all required Form 1099s?

These are two new questions the IRS is asking on business and individual tax returns as of 2011 tax return filings. How did you answer these questions? More importantly, how should you have answered these questions? Below are a few Q&As that will help you understand the IRS’ thinking and how to remain compliant with Form 1099-MISC (1099) filings in your business.

Q.  Why is the IRS suddenly asking if all 1099s have been filed?
A.  The IRS has found that there is a great amount of unreported income by independent contractors.  The IRS believes if all required 1099s are actually filed, independent contractors will report more of their income on their tax returns.

Q.  Under what circumstances is a 1099 required to be filed? 
A.  A 1099 is required to be filed if at least $600 is paid for services or rents to an individual or partnership. Fees of $600 or more paid to attorneys must also be reported on a 1099, even if the payments were made to a corporation.

Q.  What are the deadlines for 1099 filings? 
A.  The 1099s must be given to the service provider by January 31st of the year following the year payments were made. The 1099s must be mailed to the IRS by February 28th.

Q.  What are the penalties if the forms are not filed timely? 
A.  The penalties for failure to file 1099s can be up to $100 per day.

Q.  What if I don’t know if a current service provider is a corporation or not? 
A.  Ask the service provider fill out a Form W-9. This will tell you for certain if the provider is a corporation or not.

Q.  Do I need to give Cohen & Company a 1099? 
A.  If you are a client and if payments made to Cohen & Company are more than $600 in a year, then yes. Contact a member of your service team for our federal ID number and other details.

Q.  How do you determine if a new service provider is an individual, partnership or corporation? 
A.  A Form W-9 should be given to all new service providers to complete. The form will provide the name, social security or employer ID number, address and type of entity of the service provider.

Q.  Should I have a Form W-9 on file for all service providers? 
A.  Yes. Ideally a Form W-9 should be received before any payments are made to the service provider. If you pay at least $600 to a service provider who is an individual or partnership, and you do not have a valid ID number, you are required to withhold 28% of the payment and remit it to the IRS as federal withholding. If this is not done, you may be liable to pay the 28% withholding to the IRS.

Q.  Have more questions?
A.  Contact Laura White at lwhite@cohencpa.com or a member of your service team to discuss your particular situation.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

Join the Crowd? JOBS Act Opens Door to Capital — and Potential Risk

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Posted by Rob MacKinlay, CPA

Signed into law earlier this year, the Jumpstart Our Business Startups Act (the Act) aims to provide entrepreneurs and growing businesses with access to more capital, ultimately spurring job growth. The Act will, conceptually at least, make it easier for private companies to either go public or stay private longer using the “crowdfunding” approach to investing.

Crowdfunding allows businesses to attract small investments from a larger pool of investors, providing more capital to grow their businesses. The Act will require the use of either an SEC-licensed intermediary or third-party platform, such as an online portal, through which investments must be made.

Below are a few of the pros and cons private companies need to consider:

Pros

The Act:

  • Reduces the amount of SEC regulation required to offer company shares to the public.
  • Offers small business owners liquidity through the ability to recapitalize.
  • Makes it easier to raise seed capital for a new business. Companies can raise up to $1 million in aggregate within a 12-month period.
  • Expands the pool of potential advisors. Private companies qualifying under the Act can have up to 2,000 accredited investors (up from 500 previously) or 500 unaccredited investors.
  • Allows businesses to advertise/solicit for new investors.

Cons

The Act:

  • Provides increased potential for fraud and abuse. Business owners will need to implement tight controls associated with the investment process; investors will need to conduct thorough due diligence on each opportunity.
  • Will require more compliance in certain areas due to an increased number of investors along with additional communication requirements, both of which may lead to increased compliance and professional costs.
  • Provides investment limits based on the investor’s annual income or net worth. An investor making an annual income, or with a net worth, of less than $100,000 can only invest $2,000 or 5% of his or her net worth or income, whichever is greater. An investor making or worth more than $100,000 can only invest up to 10%, subject to certain limitations.

Next Steps
The SEC likely won’t issue final compliance regulations to implement the Act until late this year. But tread carefully. The details of the opportunity can make a big difference if not carefully examined upfront. If you are approached about investing in a qualifying company using crowdfunding, or if you are a company looking to gain additional investors via the provisions of this Act, contact us first to discuss and evaluate your options.

Contact Rob MacKinlay at rmackinlay@cohencpa.com for more information.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

Are You Getting the Best from Your Employees?

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Posted by Rob MacKinlay, CPA

As an employer of a private company, you have the unique opportunity to closely align your interests with those of your employees — and that can mean great success for everyone involved. Your employees, like all human beings, react according to how they are compensated and incentivized. Essentially, you will get what you reward, simple as that. The behaviors of your employees may be conscious or subconscious in nature, but we all respond according to the positive or negative incentives in our lives. And, from a business perspective, those incentives can make the difference between a successful, thriving organization and a mediocre one.

As you look at the growth and sustainability of your business, take a hard look at how your management team and employees are incentivized. Many companies don’t even realize they have policies in place that reward the complete opposite behavior they are hoping for. For example, a company that uses only top line revenue for determining bonus compensation will likely get increased sales but at the sacrifice of gross margin. Or a company that incentivizes employees strictly on the hours that they work will likely get increased hours but decreased productivity per hour. 

Aligning the interests of you and your employees doesn’t necessarily mean increased compensation. Incentives could include public recognition or extra time off. Motivating employees may be as simple as reviewing your performance management and compensation programs to tweak certain criteria, formulas or inputs. Or it could mean that you hold monthly or quarterly “state of the company” meetings to discuss your vision with your employees so that they can understand your perspective and goals.  These meetings are not only helpful from an alignment standpoint, but they are also a great opportunity to thank your employees for their efforts and recognize special achievements. Every business is certainly unique in its own way; but the issue of alignment transcends all types of organizations and groups—from companies to sports teams!

We routinely assist our clients with strategic planning, meeting facilitations, performance management systems and compensation structures. Contact Rob MacKinlay at 216.774.1181 or rmackinlay@cohencpa.com for more ideas.
 


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

Partnerships: Be Wary of Disguised Sale Rules

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Posted by Kim Palmer, CPA, MT

Often in the establishment of a new partnership, one partner (the contributing partner) contributes an asset such as land or a building and other partners contribute cash.  This is especially common in the real estate industry and is a nontaxable transaction under Internal Revenue Code (IRC) Section 721. 

However, a red flag should go up when the contributing partner receives cash from the partnership; this can be construed as a disguised sale and can create unintended tax consequences. Although one of the most common scenarios is a property contribution by a partner to a partnership with a distribution of cash from the partnership to the contributing partner (a disguised sale by the partner to the partnership), a disguised sale can take other forms:

  • a cash contribution by a partner to a partnership with a property distribution from the partnership to the contributing partner (a disguised sale by the partnership to the partner), and
  • a property contribution by one partner and cash by another partner with a cash distribution from the partnership to the partner contributing property and a property distribution to the partner contributing cash (a disguised sale between the partners).

At its root, IRC Section 707 provides if a partner transfers money or other property to a partnership and there is a related transfer of money or property to the partner (or any other partner), the transaction is considered a sale.  And it does not matter the order in which the transaction occurs, i.e., the distribution of cash can occur before the contribution of property.  Specifically, to be considered a sale, both of the following criteria must be met:

  • The money, or other consideration, would not have been transferred if the property were not transferred.
  • If the transfers are not made simultaneously, the later transfer is made without regard to the results of partnership operations.

For non-simultaneous transfers, within a two-year period, if a partner transfers property to a partnership and the partnership transfers consideration to the partner, the transfers are presumed to be part of a disguised sale unless the facts and circumstances clearly prove otherwise.

There are exceptions under the safe harbor rules, in which certain types of distributions are not considered to be payments in exchange for property, and therefore are not considered a disguised sale.

There are also rules for liabilities incurred or transferred in connection with a disguised sale. Qualified liabilities are not used to determine if the transfer is a disguised sale, while unqualified liabilities are, e.g., debt incurred within two years of the transfer is generally considered an unqualified liability and part of a disguised sale. Liability rules exist to prevent transactions in which a partner incurs debt in anticipation of the transfer of property and the partnership subsequently assumes the debt.

The entirety of the disguised sale rules are complex and can be a trap for the unwary, resulting in unintended tax consequences. But, as with any tax scenario, there are also generally opportunities, such as additional deferrals or deductions, to uncover if appropriate and strategic tax planning is conducted early on in the process.

For more information on disguised sale rules and their application to your partnership or particular situation, contact Kim Palmer at 330.255.4324 or kpalmer@cohencpa.com.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

 

Get the Most from Your International Business

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Posted by Pete Constantino, CPA, CM&AA

More and more, companies of all sizes find themselves doing business in areas outside of the U.S. And they are doing a lot more than just exporting products. I see my clients traveling, sending employees on short-term and long-term assignments, establishing companies and forming partnerships — all internationally.

Some of the daily issues to deal with often include foreign language barriers, time zones, currencies, tax laws, import/export laws, and business and general cultural differences. While a lot can get lost in translation, the benefits of a presence in other countries can be substantial:

  • A broader market to sell to
  • More access to opportunities in that market, especially when there is a “partner-on-the-ground” in the foreign country
  • Import tax savings due to manufacturing and distributing directly in the target country
  • Ability to source certain components at more competitive prices, while still having primarily U.S. content in products
  • U.S. tax benefits on export sales through strategic tools such as an IC-DISC

To best maximize these and other potential benefits of doing business internationally, and to offset the inevitable challenges, there are a number of effective strategies to consider:

  • Practice diligence. Asking the same question a number of times and in multiple ways is valuable in getting a consistent answer. Much can be lost in language translation, and, unfortunately, sometimes a less-than-genuine business partner can hide behind language confusion.
  • Be cautious with currency translation. The first step is to require that transactions be conducted in U.S. dollars, but even that can leave you open to currency risk. If your partner does absorb a currency loss, he or she will most likely look to you to absorb some of it, regardless of contract terms.
  • Know the law of the land. Pursuing a claim in another country can be a major battle. Be acutely aware going into a foreign country that its laws may not support your position in a contract, even if U.S. law generally would. Advance knowledge of foreign laws is a must.
  • Know the business and general culture of the country. Doing your homework beforehand, and having additional, trusted resources on hand will provide a great advantage. Our firm has been successful in reaching out to our Baker Tilly International affiliates in various countries to help determine if what we are being told is in fact customary in a particular country. As I was told by a CPA in Brazil: “Do not expect to replicate your business model here.”
  • Use a mix of “live” and written communications. While I always prefer live communication (phone in most of these cases), I find that we often can get much clearer understanding and answers through written communication. Although, it is true that some things just don’t translate very well whether written or spoken. So, combine plenty of written and live conversations — taking note of important cues from voice inflection, pauses, etc. — to get the most accurate picture.
  • Understand foreign and U.S. tax laws. Know how these laws will affect your employees (negatively and positively) as they work for your business outside of the US.

Doing business internationally is a way of life for most thriving companies these days. Preparing ahead of time can make a world of difference.

Contact Pete Constantino at pconstantino@cohencpa.com for more information.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

“Hard to Fall Out of a Basement” — Liz Ann Sonders Offers Cautious Optimism on Economy and Market

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Cohen & Company was honored to co-sponsor a recent event featuring Liz Ann Sonders, senior vice president & chief investment strategist for Charles Schwab & Co., Inc. One of the country’s leading financial analysts, Ms. Sonders provided our guests with her view of where the markets and our economy are headed. She focused on the primary areas of the economy, Fed policy, housing, jobs, the markets, and investor sentiment and behavior. Below is a summary of significant themes presented throughout the program.

In general, our recovery has been weak. This is par for the course, according to Ms. Sonders’ presentation, for each recovery since the late 1980s — due in part at least to mounting government debt. We’re experiencing what Ms. Sonders called a “square root recovery.” Essentially we went through a recession, rebounded to close to previous levels, and are currently in a state of leveling off, or slow growth.

Ms. Sonders also touched on the “fiscal cliff” the U.S. is approaching at the beginning of 2013. Not likely to be as severe as the numbers suggest, the fiscal drop off she referred to is anticipated due to hot issues such as the scheduled expiration of the Bush and other tax cuts and emergency benefits, the uncertainty of another AMT patch, etc. As she explained it, “It’s hard to fall out of a basement,” although even a slight drop would likely move the country back into a recession. The “good news” is that since we have not experienced a significant economic upswing thus far, the fall may not be as steep as it looks.

But Ms. Sonders believes there are indeed bright spots to focus on and strong reasons for optimism regarding our economy:

  • The household sector has de-leveraged, so while the public sector struggles with soaring debt, the private sector is doing much better.
  • The manufacturing sector has improved its competitive position in the marketplace, with job growth higher than among non-manufacturing sectors for the first time in over 35 years. Manufacturing and energy job multiples are also very high, producing a significant ripple effect of additional jobs throughout other economic sectors.
  • Credit conditions are improving, albeit slowly.
  • Significant inflation is not expected to materialize in the near future.
  • The Fed has announced open-ended QE3, and we are experiencing easy monetary policy by global central banks.
  • Housing improvement is a key indicator of an increase in jobs, and we are seeing positive signs such as an improvement in mortgage supply/demand, housing affordability at a high, and now rising sales and prices.

The stock market remains a lead indicator of the economy — and the signs here are positive as well. Investor confidence is stabilizing. Even though within recent history a majority of investors have moved in the direction of bonds over stocks, we are seeing U.S. stocks perform well relative to emerging markets stocks. Additionally, cash is high in mutual funds, pension and hedge funds have de-risked, yields are at historic lows and a record percentage of stocks are paying dividend rates above Treasury rates. And while profit margins are peaking, it does not mean stocks will necessarily go down.

But, Ms. Sonders did point out that even with positive market indicators, diversification still remains key in these volatile times, favoring portfolios with a combination of asset classes.

35 Years Strong — Happy Anniversary!

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Posted by Randy Myeroff, CPA, President & CEO

I know it’s cliché, but time really flies. I cannot believe Cohen & Company just marked its 35th anniversary on October 1. What’s even crazier is that I’ve been here for 27 of those 35 years. And the really great part? After all this time, I am still as engaged and as enthusiastic as ever about our future, and particularly about the remarkable people that I get to work with every day.

Our firm has grown exponentially since our founder, Ron Cohen, opened our doors in 1977. We’ve gone from fewer than 10 employees in one office, to now more than 250 employees in six offices. Our services also have expanded from tax, accounting and business advisory, to include business lines such as Cohen Fund Audit Services, Cohen Healthcare Consulting and Sequoia Financial Group.

One thing that hasn’t changed — but has only gotten better with time — is our firm’s culture. We are committed to helping our clients never miss an opportunity through extraordinary service, quality and innovation. And having fun has always been a critical part of our success.

I can honestly say the journey so far has been tons of fun, and there is so much more to come!
 


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.


QPRTs Help Take Advantage of Gift-Tax Window; Provide Opportunity to Retain Ownership of Assets

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Posted by Natalie Takacs, CPA

With an estate and gift tax exemption of just over $5 million due to expire at the end of 2012, high-net-worth individuals are looking to leverage the opportunity with creative asset transfer strategies. The Qualified Personal Residence Trust (QPRT) is a tool individuals should consider, due to its ability to:

  1. reduce estate tax, and
  2. allow individuals — especially those who may not want to part with their liquid assets just yet — the uncommon opportunity of gifting of a home, while retaining possession and use for an extended period of time.

How It Works
A QPRT is an irrevocable grantor trust created by an individual. While a QPRT allows an individual to retain the use of his or her home and take advantage of the exemption, a QPRT is truly created for the benefit of future beneficiaries. The grantor transfers a primary or secondary residence to the trust and retains the right to use the residence for a number of years, the term, as determined by the grantor. At the end of the term, the residence will pass to the named beneficiary.

The Tax Benefit
In effect, the retained right to use the property reduces the current value of the gift. For example, at age 60, an individual transfers to a QPRT a residence with a fair market value of $1 million, with a term of 10 years, and a Federal rate of 1%.  The value of the gift would be $772,990. The future value of the residence in 20 years (approximate life expectancy for 60 year-old) at 3% annual growth would equal $1,806,111; and the potential estate tax savings at 50% estate tax rate would equal $516,560.

So What’s The Rub
Following are a few of the important issues that someone considering a QPRT transaction must consider:

  1. The grantor must outlive the initial trust term, otherwise the value of the property will revert back to the estate. This creates a dilemma, retaining as much of a right to use the residence as possible, while at the same time insuring that it reasonable to outlive the term of the trust.
  2. The grantor cannot buy back the property from the trust.
  3. The grantor is not precluded from using the residential property once the trust term expires; however, the grantor will be required to pay a fair market value rent to the beneficiaries.

Other important Considerations

  1. QPRTs may make the most sense for properties in markets where housing values are still depreciated but are likely to rebound in the future.
  2. QPRTs work best with properties that do not have mortgages, as a bank may call a mortgage if property is transferred, future mortgage payments may result in future gifts, and termination of the QPRT with a mortgage can result in complicated part sale/part gift.
  3. During the term of the trust, all items of income and deductions are reported by the grantor.
  4. The trust can sell the property to an unrelated third party and hold the proceeds of sale in a separate account, and, if qualified and sold during the term of the trust, benefit from the capital gain exclusion.
  5. The grantor’s beneficiaries will receive a basis in the property equal to the grantor’s basis in the property.
  6. A gift tax return will be required no matter how small the remainder is, because the gift will not qualify for the annual exclusion.
  7. Furnishings and other personal property cannot be included in the trust.

The decision to create a QPRT requires balancing the potential estate tax savings against the consequences of relinquishing ownership to the next generation, and the strategy should be considered in combination with a comprehensive estate and financial plan. Nevertheless, when appropriate, a QPRT can be an extremely effective tool in transferring wealth to the next generation estate tax free.

For more information, contact Natalie Takacs at ntakacs@cohencpa.com or Chris Madison at cmadison@cohencpa.com.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.
 

Who is Watching the Cash?

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Posted by Paul Gregory, CPA

A couple of the first questions I ask a new client or prospect is: “Who is responsible for the organization’s bank statements, and what is the process for handling them?” These are questions every business owner should ask him or herself and be sure to have a finite, and good, answer for.

Fraud comes in many forms but the most common is theft of cash. That may mean writing checks to individuals or to a bogus company, paying personal credit card bills, duplicating payments to vendors in hopes of getting refunds, depositing money or wiring transfers into personal accounts, and many other scenarios.

Many small businesses have one or two people in their accounting department, generally a bookkeeper with little accountability, a stamp signature and total control of the accounting function. With one person in charge and no clear separation of duties, it is a situation ripe with opportunity. Add in even one of the other two sides of criminologist Dr. Donald Cressey’s fraud triangle — pressure/incentive/need or rationalization — and that could mean trouble.

Opportunity is the only side of the triangle business owners can reasonably control. Pressure can come from something as small as needing $10 for gas to get home, easily “borrowed” from petty cash. Rationalization often stems from unhappiness in the work place or a feeling of being overworked and underpaid. Sound internal controls and careful oversight are the only ways to alleviate the opportunity for fraud.

One of the most practical recommendations I give to clients on this issue is to make sure they identify one person, independent of the accounting function (most often the owner) to receive the unopened bank statements, open and review all checks written. The designated individual should closely identify the payee, signatures on the front and back, bank activity, wire transfers, debits, credits to the account, etc. In today’s electronic age, owners can do this more easily than ever via online banking statements. Making inquiries to the individuals writing checks, making deposits and reconciling the account may be enough of a deterrent to internal fraud.

Remember, it is easier to prevent fraud from occurring than detecting fraud once it has happened. When the money is gone, recovery is expensive, time consuming and often fruitless, so be sure the appropriate person is watching your cash.

Contact Paul Gregory at 216.774.1261 or pgregory@cohencpa.com for more information.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

A Day to be Thankful For

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Posted by Ron Cohen, CPA

As you all know if you have been awake anytime during the last few months, today is Election Day. 

In three weeks, we will be celebrating Thanksgiving. On that occasion, we will be expressing our gratitude for all the wonderful things we have been fortunate to experience. Among the most precious of those, in my opinion, is the good fortune to live in the United States of America, a country unique in all history. 

Accordingly, let us not take for granted the right to vote; let us select our leaders and decide on issues that affect us professionally and personally. If you have not done so as yet, please make it a priority to vote before the polls close this evening. 
 

Cliff Diving Is Not for the Faint of Heart

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Posted by Mike Kolk, CPA

In cliff diving the difference between a masterful performance and crippling calamity is razor thin. Now that the presidency and the composition of Congress for the next two years have been determined, our elected fiscal cliff divers must navigate a similarly thin line between success and failure.

So how should you go about tax planning given the slim difference between landing with a splash or a crash? By being informed, prepared and flexible. Clearly, as is true every year, tax planning is personal to your unique situation and sometimes may be best served by acting contrary to general guidelines. This is the reason it always makes sense to touch base with your tax planner before the year ends.

This year the general guidelines are especially fuzzy. We have a lame duck Congress that may or may not try to act before terms expire. We also have the expiring Bush tax cuts that will increase taxes at all levels at year end. Absent a change, higher earners will feel the pinch of higher tax rates; middle and lower earners may have to pay taxes for the first time in a while or be sideswiped by a significant alternative minimum tax hit that has been patched over for some time.

Layer on top of this the distasteful political posturing and gimmickry of both parties. Waiting until tax rates rise by statute in 2013 and from there reducing them retroactively is not a tax cut if the result is higher rates than 2012. It’s no different than increasing 2013 tax rates now. However politicians don’t always see it that way. There is also the growing specter of a complete rewrite of the tax code. In my opinion we are due for one — recent rewrites were in 1939, 1954 and 1986. If that happens, all bets are off and many sacred cows may end up as lunch.
So what are the general guidelines this year? The status quo offers a reasonable baseline to compare against in this sense. It is safe to conclude that 2013 taxes will not be going down from today’s levels, so this will not be a year in which finding ways to defer income that might otherwise be taxed or to accelerate most deductions that might otherwise be deferred would be typical.

Additionally, the time value of money continues to be at historical lows. Accordingly, the economic benefit of deferring tax costs into the next year is less powerful than in prior years. This means that the opportunity cost of accelerating net taxable income into 2012 is far lower in the event we end up with some kind last minute “Mega Patch” that merely extends most of the current tax laws into 2013. A patch would simply buy time to address the bigger issues. Based on recent congressional trends, this alternative may be likely. Unfortunately there seems to be a required game of political chicken that first must occur. Time is not our friend here, but the downside seems to be limited.

So the bottom line is talk to your tax team, map out alternatives and be ready to act if we are fortunate enough to buck recent history and have certainty about taxes sooner. Some plans will be lucky enough to have hindsight built into the strategy (for example, Roth IRA conversions and installment sales of capital assets other than publicly traded stock). Many plans require more custom tailoring, but generally, pulling income into 2012 and deferring deductions into 2013 will provide increased chance for savings and less risk of missed opportunity. As always, be careful if this shift distorts rates in either year.

Ironically, cliff diving began in the 1700s in Hawaii as a way for citizens to show loyalty to the leader. Now we have a Hawaiian born leader who, with Congress, is facing one of the most dangerous cliffs in the country.

Contact Mike Kolk at 330.255.4315 or mkolk@cohencpa.com for more information.


This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.

 

New Mileage Rates for 2013

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Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car, van, pickup and panel truck, will be 56.5 cents per mile for business use; 24 cents per mile driven for medical or moving purposes; and 14 cents per mile driven in service of charitable organizations.

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