Posted by Natalie Takacs, CPA

Sun setting tax provisions as well as new Patient Protection and Affordable Care Act (PPACA) provisions will mean changes in payroll-related taxes for 2013. Below is a list of some of the more significant changes to be aware of:

Employee Social Security Tax Withholding Reverts Back to 6.2%
For years 2011 and 2012, the employee Social Security tax withholding rate was reduced by 2% to a rate of 4.2%. If this provision is not extended, beginning January 1, 2013, the Social Security tax withholding rate will revert back to 6.2%. The Social Security wage base limit is $110,100 for 2012 and it will increase to $113,700 for 2013.

Additional Medicare Payroll Tax For Certain Individuals
Beginning January 1, 2013, PPACA will require higher-income taxpayers to pay an additional Medicare tax on wages, other compensation and self-employment income over certain thresholds. Under the new law, high-income individuals will pay an additional Hospital Insurance (HI) tax of 0.9% on earned income in excess of:

• $200,000 for single, head of household with qualifying child, and qualifying widow(er) with a dependent child,
• $250,000 for married couples filing jointly, and
• $125,000 for married couples filing separately.

Employers are required to withhold the additional 0.9% Medicare Tax on compensation in excess of $200,000 paid to employees in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the additional Medicare Tax. Any unnecessary Medicare withholding will most likely be claimed as a credit on an individual tax return for 2013. This additional withholding is not required to be matched by the employer.

Health Care Flexible Spending Account Contribution Limits
Beginning in 2013, the Patient Protection and Affordable Care Act will limit the maximum amount that an employee can elect to contribute to a health care flexible spending account (FSA) to $2,500 per year. Prior to this enactment, employers were permitted to enact any maximum annual election for their employees.

Income Tax Increases
An individual’s personal income tax liability may increase for 2013 due to tax changes, including:  

• Reinstatement of the 36% and 39.6% federal income tax brackets;
• Increase of the capital gains rate from 15% to 20%;
• Increase in the dividends tax rate from 15% to 39.6%;
• Reinstatement of the phaseout of itemized deductions;
• Reinstatement of the phaseout of personal exemptions;
• Implementation of the new 3.8% Medicare tax on net investment income over $200,000 ($250,000 for married taxpayers who file jointly)
  • The net investment income that is subject to the 3.8% tax consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Income from an active trade or business isn't included in net investment income, nor is wage income. However, passive business income is subject to the Medicare contribution tax. Income from a business of trading financial instruments or commodities is also included in net investment income.

Please consult your tax advisor regarding the impact that these and other tax-related changes may have on your personal income tax liability in 2013.

For more information, contact Natalie Takacs at ntakacs@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.

Posted by Angel Rice, CPA

Starting with the 2012 year, the Patient Protection and Affordable Care Act (PPACA) requires employers to report the cost of coverage under its group health plan. For now this applies only to employers who filed at least 250 form W-2s for the 2011 calendar year.

Employers subject to the reporting requirement generally include any employer that provides “applicable employer-sponsored coverage” during a calendar year, including businesses, not-for-profit organizations and government entities.

The value of coverage will be reported in Box 12 of the W-2 and, for most plans, includes both the employer and employee contributions to the plan. Determining the value will be a slightly different process depending upon if the plan is self funded or fully funded. Employers are encouraged to coordinate with their benefits and payroll providers to help meet these reporting requirements. The IRS has also posted significant guidance, including common questions and answers and a chart illustrating the types of coverage that must be reported.

Additional guidance is expected in 2013 for small employers. Any guidance that expands the reporting requirements will only go into effect for calendar years that start at least six months after issuance. Said another way, if guidance is not forthcoming by the end of June, small businesses will not have to report for the 2013 calendar year.

If you have any questions or would like more information please contact Angel Rice at arice@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.
 

Posted by Robert Venables, CPA

Starting in 2013, high-income taxpayers will face two new taxes—a 3.8% Medicare contribution tax on net investment income and a 0.9% additional Medicare tax on wage and self-employment income. Here's an overview of the two new taxes and what they may mean to you.

3.8% Medicare Contribution Tax
This new tax will only affect taxpayers whose adjusted gross income (AGI) exceeds $250,000 for joint filers, $200,000 for single taxpayers and $125,000 for married filing separately. These threshold amounts aren't indexed for inflation. Thus, as time goes by, inflation will cause more taxpayers to become subject to the 3.8% tax.

If AGI is above the threshold, the 3.8% tax will apply to the lesser of (1) net investment income for the tax year or (2) the excess of AGI for the tax year over the threshold amount. This tax will be in addition to the income tax that applies to that same income. The Medicare contribution tax must be included in any estimated tax calculation.

The tax also applies to estates and trusts, but with different threshold amounts that start at $11,350 (this amount is based on the 2011 tax schedule and may increase slightly for 2013).

Net Investment Income
The “net investment income” that is subject to the 3.8% tax broadly consists of interest, dividends, annuities, royalties, rents and net gains from property sales. Passive business income is subject to the Medicare contribution tax. Income from a business of trading financial instruments or commodities is also included in net investment income.

Wage income is excluded from net investment income as is most income from an active trade or business. Income that is exempt from income tax, such as tax-exempt bond interest, is likewise exempt from the 3.8% Medicare contribution tax. Thus, switching some taxable investments into tax-exempt bonds could impact exposure to the 3.8% tax. Of course, this should only be done with due regard to income needs and investment considerations.

Home Sales
As mentioned, the 3.8% tax applies to home sales. If the sale relates to a primary residence, the taxpayer may be able to exclude up to $250,000 of gain, or up to $500,000 for joint filers, when figuring income tax. This excluded gain won't be subject to the 3.8% Medicare contribution tax. However, gain that exceeds the limit on the exclusion will be subject to the tax. Gain from the sale of a vacation home or other second residence, which doesn't qualify for the income tax exclusion, also will be subject to the Medicare contribution tax.

Retirement Plan Distributions
Distributions from qualified retirement plans, such as pension plans and IRAs, aren't subject to the Medicare contribution tax. However, such distributions may push AGI over the threshold that would cause other types of investment income to be subject to the tax. Qualified Roth IRA distributions are neither subject to the Medicare contribution tax nor included in AGI. Distributions from traditional IRAs will be included in AGI, except to the extent of after-tax contributions, although they won't be subject to the Medicare contribution tax.

Additional 0.9% Medicare Tax
Starting in 2013, some high-wage earners will pay an extra 0.9% Medicare tax on a portion of their wage income, in addition to the 1.45% Medicare tax that all wage earners pay. The 0.9% tax applies to wages in excess of $250,000 for joint filers, $125,000 for married individuals filing separately and $200,000 for all others. The 0.9% tax applies only to employees and is not matched by employers. While the tax burden clearly rests on the employee, once an employee's wages reach $200,000 for the year, the employer must begin withholding the additional 0.9% tax from the wages. There may be situations in which the employer is not required to withhold the additional tax but the employee is subject to it. In such cases, the employee would pay the additional tax on his or her income tax return.

Self-Employment Tax
An extra 0.9% Medicare tax also applies to self-employment income for the tax year in excess of $250,000 for joint filers, $125,000 for married individuals filing separately and $200,000 for all others. This 0.9% tax is in addition to the regular 2.9% Medicare tax on all self-employment income. While self-employed individuals can claim half of the self-employment tax as an income tax deduction, the additional 0.9% tax won't generate any income tax deduction.

There are many nuances surrounding these taxes that have yet to be finalized. The IRS recently issued proposed regulations related to some of these issues, and we will keep you informed as the details are finalized. In the meantime, please talk to your tax advisor to digest the larger picture as it relates to your specific tax situation.

For additional information, please contact Robert Venables.

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.

Posted by Tracy Monroe, CPA

As the year wraps up, we find ourselves with a lame-duck Congress that may or may not successfully act on the fiscal situation before terms expire. We also have the expiring Bush tax cuts that will increase taxes on 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 (AMT) hit that has been patched over for some time.

The outlook is especially fuzzy and year-end tax planning must focus on being informed, prepared and flexible. While tax planning is never cookie cutter, with so many potential changes this year, communication with your tax professional and examining your specific situation will be more important than ever.

Some of the basic items we address in our Tax Planning Guide are outlined below.  Incentives do exist, but are very dependent on circumstances.

Refundable AMT Credits
Through 2012, a refundable AMT credit applies to people with long-term unused AMT credits (at least four years old). It was enacted to provide relief to those who exercised ISOs and paid AMT in the dotcom days. The law allows taxpayers to claim 50% of their unused long-term AMT credits without AMT limitations.

Capital Gains/Losses
Through the end of 2012, taxpayers below the 25% tax bracket enjoy a zero percent tax rate on dividends and capital gains, providing opportunities to realign portfolios. In addition, excess losses can be carried forward indefinitely.

Estate & Gift Planning
The window is rapidly closing on the $5 million ($10 million for a married couple) estate, gift and generation-skipping tax exemptions. After 2012, the exemptions are scheduled to revert to $1 million. As a general planning rule, the weakened state of our economy creates a window to review estate and life insurance plans for unexpected opportunities.

Retirement Account Changes
The $100,000 Adjusted Gross Income limitation on Roth conversions was repealed in 2010, and moving forward anyone, regardless of income, can convert their traditional IRA into a Roth IRA. Now also may be a good time to consider making IRA contributions, review beneficiaries or roll inherited qualified plans into an inherited IRA as a tool to defer income tax.

Debt Relief
Individuals can exclude up to $2 million of mortgage debt forgiveness on a principal residence for indebtedness discharged on or after January 1, 2007 and before December 31, 2012. The relief is only related to acquisition debt and refinancing to the extent it does not exceed the refinanced debt.

Medicare Surcharge Taxes
Starting in 2013, high-income taxpayers will face two new taxes — 0.9% additional Medicare tax on wage and self-employment income in excess of $200,000 and a 3.8% Medicare contribution tax on net investment income. (see separate post).

Given the continued uncertainty, basic planning within the few areas known to be set is a good place to start.

Contact Tracy Monroe for additional 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.

Posted by Tracy Monroe, CPA

House Speaker John Boehner and President Obama insist that they’re not giving up on the currently stalled talks to avoid the fiscal cliff.  President Obama laid the ground work Friday for a smaller deal to be reached after the Christmas holiday calling on Congress to find a way to extend the existing tax rates for families making less than $250,000 annually, let the rates expire for top earners and then negotiate on spending cuts and other fiscal issues.

Obama called for the plan after House Speaker Boehner scuttled his own proposal Thursday night to extend tax cuts for families earning less than $1 million a year, after realizing he didn’t have enough votes.

The next proposal to advance in Congress likely will come from the Senate, now that Boehner has asked leaders of the Senate to try their hand.  The Senate returns to Washington on Thursday.  There are three scenarios the Democrats in the Senate are considering: 1. Go over the cliff, 2. Push for a fall back measure or 3. Push for a broad deal, such as the deal that Obama offered last weekend.

1) Go Over the Cliff:  A new Congress convenes on Jan. 3, 2013.  In this scenario, the politics of the vote in the new year would be much easier because of the politics of the tax vote would be turned from voting to raise taxes to voting to cut taxes, since the tax cuts would have expired on Dec. 31.

2) Pass a Fall Back Measure: The Senate could take up the bill it already passed earlier this year to keep the tax cuts in place for the households with income below $250,000 and add the AMT fix, physician Medicare reimbursement fix and estate tax extension at the current rate.  This would be harder for the Senate Democrats to pass because they will need seven or eight Republicans in the current Congress to cross party lines. They also want to be sure whatever they pass could also pass the House.  Reid does not want to have Senate Democrats take a tough vote that will go nowhere in the House.

3) Pass a Broad Deal: The Senate would take the latest offer from President Obama to Boehner that has tax increases on household income over $400,000 and spending cuts, and turn it (or something close to it) into a piece of legislation.  In this scenario the Senate Democrats would have to be sure they could get seven to eight Republican votes to pass it and that it would pass the House before going this route.

If nothing is done this year and we go over the fiscal cliff, the Bush era tax cuts will expire for everyone; the estate tax will go back to a $1 million exemption and a 55% tax; many other tax provisions will expire; the AMT exemption will be reduced for 2012; and the automatic spending cuts as a result of the sequestration   will take effect on Jan. 3, 2013.  Additionally, on Jan. 1, 2013, the 2% employee payroll tax holiday will end and the withholding for social security will return to 6.2%.

The IRS has warned lawmakers this week that if they don’t act to protect the middle class from the AMT by Dec. 31, up to 100 million taxpayers may not be able to file their 2012 taxes until late March. Payroll tax processors have said that if they don’t receive any further guidance from Washington, they’ll stick with the 2012 withholding tables.

We certainly hope Congress addresses these considerable issues in a responsible manner; it's getting harder to hang on.

Contact Tracy Monroe for additional 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.
 

While a deal is in sight to prevent a tax hike on most taxpayers, a deal is not done as of yet. 

Rumor has it that the tax increases will apply to individuals at $400,000 of income and couples at $450,000 of income.  In his address this afternoon, The President did mention that this tax increase will be permanent. He also seemed to indicate that the child tax credit, tuition credit, clean energy credits, unemployment insurance and R&D credit will be extended. He also mentioned that the automatic spending cuts will likely be postponed for a couple of months. There is talk of the estate tax going up, but there were no indications as to what it might be.

The President indicated that he wanted a larger deal to get done, but that will not happen. He urged everyone to work together to get a deal done in stages that will take a balanced approach to deficit reduction through cutting expenses and raising revenue from the wealthy taxpayers.
 

The financial markets avoided going over the fiscal cliff today because of the House passage of the American Taxpayer Relief Act of 2012 HR 8 by a vote of 257-167.  Many high ranking Republicans, including the House Majority Leader Eric Cantor, sought to amend the law to include a package of spending cuts but without success. The Senate passed this same bill 89-8 in the early morning hours of January 1 following a last minute agreement reached between Senate Minority Leader Mitch McConnell and Vice President Joe Biden.

Following are some of the major provisions included in HR 8.

• Extend the Bush era tax cuts for individuals earning under $400,000 annually and $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6%, up from the current 35%.
• Establish the estate tax top marginal rate at 40%, with an inflation adjusted exemption for estates under $5 million and spousal portability.
• Provide a permanent patch for the AMT.
• Tax dividends and capital gains at 20% for individuals earning over the $400,000 and $450,000 for couples. 
• Reinstated the Pease limit on itemized deduction (3% reduction) for income of $300,000 and the Personal Exemption Phase-out for $250,000.

Many business extenders were included in the Bill, including a two-year extension of the R&D credit through 2013 and extension of the 15-year life for Qualified Leasehold Improvements, Qualified Restaurant Property and Qualified Retail property.  Also, favorable depreciation provisions were also included for 2013, including 50% bonus depreciation for 2013 and Section 179 expensing at $500,000 (with a phaseout at $2 million of additions).  The new markets tax credit was renewed as well.

For individuals, extensions of the personal tax credits for child care, college tuition and Earned Income Credit for five years were included. Jobless benefits for the long-term unemployed were extended for one year, and cuts in Medicare reimbursements to doctors were blocked.

The bill does not include an extension of the 2% employee payroll tax holiday.

The legislation delays the budget sequestration spending cuts for two months. However, it does not address the increase of the debt ceiling and this sets the stage for another fight between Democrats and Republicans in the new term.

For specific information regarding these and other provisions included in HR 8, please contact a member of our tax department.

Posted by Adam Hill, CPA

Another year and another successful Real Estate Roundtable held for our clients yesterday at the Cleveland Marriott East. The program covered IRS repair regulations, a panel discussion of leading industry professionals on tax credit structuring as a result of the historic Boardwalk Hall case, and key provisions of the American Taxpayer Relief Act of 2012. (View the full presentation.) Below are a few of the highlights from the Tax Act and their potential impact:

Notable Business Tax Extenders

• 15 year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
• Increased expensing limitations and treatment of certain real property as section 179 property
• Extension and modification of bonus depreciation
• Extension and modification of research credit
• Extension of new markets tax credit ($3.5B for 2012 and 2013)
• Basis adjustment to stock of S corporations making charitable contributions of property
• Reduction in S Corporation recognition period for built-in gains tax
• Environmental remediation costs are no longer eligible to be expensed as of 12/31/11

Takeaways: The qualified leasehold improvement property extension will benefit real estate owners investing in tenant build-outs in 2013. Combined with bonus depreciation, the extension provides significant and immediate opportunities for deductions that otherwise would be taken over a 39-year period.

Bonus Depreciation

• Extension of 50% bonus depreciation through 2013

Takeaways: To be eligible for bonus depreciation, the asset must be new and be tangible property with a recovery period of 20 years or lessor qualified leasehold improvement property.

Section 179 Depreciation

• Extension of section 179 depreciation limit at $500,000, with a phase-out “in service” limit of $2 million

Takeaways: For contractors, this is an excellent opportunity for use with machinery, equipment, etc. Also keep in mind that Section 179 property can be new or used and is subject to taxable income limitations.

Conservation Property

• Qualified Conservation Property – Deduction is limited to 50% of taxpayer’s contribution base (carryover is limited to 15 years)
• Special rule for conservation property was extended to 12/31/13 (originally set to expire on 12/31/2011)

Takeaways: The provisions in the Act allow taxpayers to deduct more of their conservation property contributions in 2013. Adding a conservation easement to a historic rehab project could help move along a stalled project. 

Notable Energy Tax Extenders

• Credit for energy-efficient existing homes
• Credit for energy-efficient new homes
• Credit for energy-efficient appliances
• Credits with respect to facilities producing energy from certain renewable resources

– One year extension on credits for wind-power facilities, now through 1/1/14
– One year extension for open and closed loop biomass facilities, now for facilities that have begun construction before 1/1/14
– One year extension for IRC section 45 property to be claimed through IRC section 48

Takeaways: If you are planning on making energy improvements to your home, you may be able to offset some of the cost.  The wind industry also should get a boost with the one-year extension of the investment tax credit for wind deals. 

It’s also important to note that the Patient Protection and Affordable Care Act, or health care reform, also created the 3.8% Net Investment Income Tax (NIIT). Effective January 1 of this year, the tax applies to investment income such as rents and other income from passive business activities. Rental activity may, however, be considered active, and therefore not subject to the tax, if you qualify for and elect real estate professional status. Learn more about the NIIT.

View the full presentation for more details on the Act and other information covered at the seminar or contact Adam Hill at ahill@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.

Posted by Jenna Santisi

Does your auditor prepare your bank reconciliations, or did your most recent audit have to be completed in an unreasonable time frame? The independence issues these types of activities may create for your auditors will now be under closer scrutiny based on the recent revision of the Government Accountability Office’s (GAO) Yellow Book. That may mean enduring more questions from your auditors regarding independence issues for any financial audits or attestation engagements conducted for periods on or after December 15, 2012.

The Yellow Book revision established a “conceptual framework” for making independence determinations based on each situation’s unique facts and circumstances. Auditors must identify potential threats to independence, evaluate the significance of those threats and apply safeguards to eliminate any resulting risks.

There are seven broad categories of threats to independence that auditors are required to evaluate when they’re identified.  Auditors must evaluate these threats both individually and in the aggregate:

1. Self-interest
2. Self-review
3. Bias
4. Familiarity
5. Undue influence
6. Management participation
7. Structural

Once a threat is identified, the auditor must determine whether the threat relates to a non-audit service, specific types of which are prohibited by this latest Yellow Book revision. Non-audit services, which auditors frequently provide to smaller entities, can include preparing financial statements, journal entries other than proposed entries and reconciliations. However, these services are not considered to impair independence if the entity being audited assumes all management responsibilities; designates an individual who has suitable skills, knowledge or experience to oversee the service; evaluates the results of the service and accepts responsibility for the results of the service. An example of a non-audit service that would impair independence is if the auditor determined or changed journal entries, account codes or classifications for transactions, or other accounting records for the entity without obtaining management’s approval. If your auditor provides any type of non-audit services, be prepared to have a discussion with them about independence.

If the auditor identifies any significant threats to independence, safeguards must be identified and applied. Safeguards are controls designed to eliminate, or reduce to an acceptable level, threats to independence. In some cases, multiple safeguards may be necessary.

Auditors must document the threats and resulting safeguards. In certain situations, the auditor may be able to rely on safeguards that the organization has implemented. In this scenario, be prepared to answer more questions than usual to identify any safeguards present that may alleviate the situation.  After safeguards are applied, their effectiveness must be evaluated. If the applied safeguards did not eliminate an unacceptable threat or reduce it to an acceptable level, independence would be considered impaired and new auditors would be needed.

Contact Jenna Santisi at jsantisi@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.

Posted by Ray Polantz, CPA, MT

For years, exporters have benefitted from the Interest Charge Domestic International Sales Corporation (IC-DISC) structure, which for many taxpayers provides permanent tax savings due to the reduced tax rate on qualified dividends. However, those reduced rates were in danger of being eliminated by the fiscal cliff, which meant many businesses exporting goods were also in danger of losing the tax benefits associated with an IC-DISC. The uncertainty also caused many companies to hold off on setting up new IC-DISCs.

Thanks to the American Taxpayer Relief Act, the preferential tax rate on qualified dividends was extended, thereby extending the benefits of the IC-DISC structure. For 2013, qualified dividends are taxed at:

• 15% for individuals with income below $400,000 or $450,000, depending on filing status; and
• 20% for individuals with higher incomes.

Beginning in 2013, taxpayers with income above $200,000 or $250,000, depending on filing status, may also be subject to a 3.8% Medicare tax on dividend income. (Read New Medicare Tax Takes Effect in 2013.). Even if the new Medicare tax is applied in addition to the qualified dividend rate, the resulting tax rate in most cases is still much lower than that on ordinary income.

The moral of the story? The IC-DISC structure still represents a tremendous potential tax benefit for small- and medium-sized exporters.

For more information, contact Ray Polantz at rpolantz@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.

Posted by Robert Venables III, CPA, JD, LLM

Oil and gas has become a hot topic in Ohio over the last few years for a variety of reasons. Such increased focus has naturally led to more tax-related questions in this area. One of the most frequently asked questions is whether a lease bonus can be treated as a capital gain instead of ordinary income. Generally the answer is no because, in the typical agreement, the landowner retains a continuing interest in the property (i.e. the mineral rights). However, if the taxpayer wants capital gain treatment, there are ways that these transactions can be structured to achieve that result. Taxpayers should discuss the various options with their tax professional before entering into any agreements so they fully understand the tax and economic consequences.

Another area of the tax law that has received increased attention is the Ohio real property tax. The main question is: at what point can real property taxes be levied on the mineral rights? Until recently, taxes were not levied on mineral rights until an active and producing well was on the property. Once a well was active and producing, the Ohio Revised Code provided the method for determining the mineral value for purposes of assessing property taxes. The discovery of Utica Shale has lead some county auditors to take the position that an active and producing well does not need to be on the property in order for taxes to be assessed. In these cases, the auditors are using a fair market value approach to valuing the mineral rights. Some auditors have been challenged and the outcome will likely have significant implications in this area for the foreseeable future.

For more information, contact Robert Venables III at rvenables@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.

Posted by Mike McGivney, CPA, MA

On Thursday, February 7th, the IRS announced the release of $150 million of Advanced Energy Manufacturing Tax Credits under IRC 48C. These tax credits are available to taxpayers who invest in manufacturing property in order to re-equip, expand or establish a manufacturing facility for the production of property used in an advanced energy project.

Examples of advanced energy projects include:

• Solar, wind, geothermal or other renewable energy projects
• Electric grids and storage for renewables
• Fuel cells and microturbines
• Energy storage systems for electric or hybrid vehicles
• Carbon dioxide capture and sequestration equipment
• Equipment for refining or blending renewable fuels
• Equipment for energy conservation, including lighting and smart grid technologies
• Other advanced energy property designed to reduce greenhouse gas emissions may also be eligible as determined by the Secretary of the Treasury

The credit is 30% of the cost basis, and all credits are awarded on a competitive basis.  Applications must be submitted by April 9th.

For more information, contact Mike McGivney at mmgivney@cohencpa.com or Adam Hill at ahill@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.

Posted by Michelle Wright, CPA, MST

Beginning in 2013, taxpayers filing quarterly Ohio Commercial Activity Tax (CAT) returns will see a change in how the $1 million exclusion is applied.

Old Rule
Prior to the recent tax law change, quarterly CAT filers were eligible for an exclusion of $250,000 per quarter. Any unused exclusion amount could be carried forward for up to three consecutive calendar quarters, regardless if those quarters fell outside the calendar year when the unused exclusion was created.

New Rule
Under the new rule, which takes effect for tax periods beginning on or after January 1, 2013, a quarterly filer will exclude the first $1 million of taxable gross receipts on the first quarter return, which, for many small business taxpayers, will likely defer payment on gross receipts until later in the year. Any unused portion of the exclusion will be carried forward to subsequent quarters but only to those that fall within the same calendar year. If the $1 million exclusion is not used within the calendar year, it will be lost.

For example, a quarterly CAT return filer has $850,000 of Ohio gross receipts for the first quarter of 2013.

What Next
For those taxpayers filing quarterly CAT returns, the first quarter of 2013 is due May 10. Be sure to use the exclusion amount of $1 million for first quarter sales, paying CAT only on the amount above $1 million. For many small businesses, this will mean that only the minimum initial filing fee of $150 will be due with the first quarter return.

For more information or questions about CAT return filing, contact Michelle Wright at mwright@cohencpa.com or any member of our state and local tax 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.

Posted by Kristen Hornyak, BSN, RN, CPC

Obtain Your Final eRx and PQRS Incentives, Avoid Penalties

Changes are imminent to two significant programs affecting Medicare Part B Fee-for-Service providers. The incentive portion of the Electronic Prescribing (eRx) Incentive Program winds down in 2013, meaning this is the last year for eligible individual providers and group practices to qualify for incentive payments for e-prescribing medications. Payment penalties will begin in 2014 for those not successfully e-prescribing to patients.

Also, 2014 is the last year to qualify for incentives from the Physician Quality Reporting System (PQRS) for eligible providers who report data on quality measures. Payment adjustments for those eligible and not reporting the data will begin in 2015 and continue indefinitely.

The following information can help providers obtain the last of the incentives and possibly avoid payment adjustments related to these programs — make sure you get all your carrots and avoid any sticks.

eRx Incentive Program
December 31, 2013, is the end of the reporting period for eligible providers to receive a .5% eRx incentive payment. Providers looking to receive their incentives must:

• Generate eRx events and report the required number of denominator eligible visits
• Report by claims, registry or qualified Electronic Health Records (EHR)
• Ensure qualifying claims are processed by February 28, 2014

The six-month period of January 1, 2013, through June 30, 2013 is critical for providers who have never e-prescribed. To avoid a 2% payment adjustment in 2014, providers must:

• Report by claims only
• Ensure claims are processed by July 26, 2013

Or providers must satisfy one of the following requirements:

• Have been a successful e-prescriber throughout the 12-month period of 2012
• Be a successful e-prescriber for the first six months of 2013
• Report a 2014 hardship
• Achieve meaningful use of EHR for the 12-month period of 2012 or six-month period in 2013
• Demonstrate intent to participate in the EHR Incentive Program by June 30, 2013

PQRS
The .5% PQRS incentive payment is still available for 2013 and 2014. Providers looking to receive their incentives must:

• Be an eligible provider
• Report by claims, registry or qualified EHR
• Choose individual or group measure
• If an individual provider, select at least three clinically applicable measures

Providers who do not achieve the PQRS incentive in 2013 may find themselves facing a 1.5% penalty in 2015, because payment adjustments under PQRS are applied two years after the reporting year. Accordingly, 2016 payment adjustments of 2% will be based off of reporting year 2014, and so on. Providers hoping to avoid PQRS 2015 payment adjustments must satisfy one of the following in 2013:

• Meet criteria for satisfactory reporting for PQRS incentive
• Report one valid measure or one measure group*
• Elect to be analyzed under administrative claims based reporting

* Selection of a successful measure should involve an analysis of the most frequently treated disease burdens in your practice.
 

For assistance in complying with the eRx Incentive Program or PQRS, contact Kristen Hornyak, RN at khornyak@cohencpa.com or any member of the healthcare team. Additional information on the programs can also be found on the CMS website.

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.

Posted by Jen Tapia, CPA, MAcc

Time is running out for businesses that have exposure to use tax (and are not paying it) to take advantage of the Ohio Department of Taxation’s (ODT) Use Tax Amnesty Program. The program is scheduled to end on May 1, 2013.

Use tax is the compliment to sales tax and is levied at the same rate as sales tax.  Use tax comes into play when a taxable purchase is made but no sales tax is collected. The purchaser must then self-assess use tax on the transaction.

In early 2011, ODT began an initiative to identify all businesses that are registered with the Ohio Secretary of State but do not have a use tax account. Whether or not your business is actually subject to the use tax does not matter. Even having tax-exempt status does not matter. If you do not have an account, you may be audited and could face significant tax liabilities, interest and penalties.

Businesses can apply for amnesty as long as they have not received an assessment for Consumer’s Use Tax. Under amnesty, the business must pay the use tax liability from January 1, 2009 through the present. There will be no penalties due and no interest as long as the business did not register for a use tax account prior to June 1, 2011. Businesses that registered for an account prior to June 1 will owe interest on the use tax liability remitted.

If you are not registered for a use tax account, it could make sense to set up an account even if you do not take advantage of the Use Tax Amnesty Program. By registering and filing quarterly use tax returns, even if they are zero returns, the statute of limitations starts running and, upon audit, the ODT would be limited to a look-back period of four years rather than an unlimited period.

Additionally, after the amnesty program wraps up, the ODT will begin looking more closely at businesses that have not taken advantage of the amnesty program and that still do not have a use tax account with the state.

Make it a priority to determine if your business has a use tax account and if it is consistently filing use tax returns with the state.

If you do not have an account or are not regularly filing, contact Jen Tapia at jtapia@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.

Posted by Keith Klodnick, CPA

Fraud can have a serious impact on a business; and, unfortunately, many companies are ripe for the taking. Owners and management need to be acutely aware of the warning signs and prevention methods that will help reduce the risk and impact of fraud.

According to the Association of Certified Fraud Examiners (ACFE), fraud costs any given entity an estimated 5% of its revenues each year. Private companies are reported to have a median loss of $200,000/year, with even greater losses reported when broken out by industry per year:  $375,000 in real estate; $300,000 in construction; $250,000 in oil and gas; and $200,000 in manufacturing.

What makes a company an easy target? The ACFE sites weak internal controls as the culprit for 74% of fraud instances. Typical “fraudsters” are males ages 35 to 45. Expense reporting is an area of “opportunity,” including  double reporting and the usage of fake receipts. (There are even websites that allow individuals to create and order their own professional-looking fake receipts.) Paying invoices to fake vendors is another way employees can skirt the system. Additional areas ripe for fraud include payroll, vendor and customer kickbacks; employee incentives (e.g., pay incentives for sales, profits, gross margin, attendance record, no injuries, etc.); bribes; stolen inventory or fixed assets; and the abuse of company credit cards.

Detect It

The ACFE reports that management review and internal audits each account for approximately 15% of detected cases. Management and owners need to take a more active role in identifying fraud early on. Look for some of these key red flags:

• Questions regarding management integrity
• Management emphasis on meeting projections and goals
• Frequent disputes with accounting firm
• Weak internal control environment
• Management compensation heavily tied to operational results
• Receivables and payable increase while sales and profits decrease
• Low employee morale/motivation
• Operation and financial decisions controlled by one person or small group
• Management and key personnel turnover is high
• Frequent and unusual transactions just prior to end of accounting period
• Line of credit drawn to maximum for extended periods of time
• Significant acquisition activity
• Frequent and significant complex transactions
• Abnormal changes in account balances
• Shortages in cash, investments, inventories or other assets
• Supporting documents altered or missing
• Unusual write-offs
• Complaints from customers about their accounts
• Incomplete financial data
• Infrequent or late financial reports
• Large liabilities related to unexpected contracts
• Vendor lists that show duplicate vendor names, or very similar names, or addresses
• Vendor invoices with the same numbers or are in sequential order (unless you happen to be this vendor’s only client)
• Failure to correct internal control deficiencies noted in prior periods
• Sudden departure of personnel in key positions
• Appearance of personnel living beyond their means

Also beware of the “perfect employee.” While every business owner wants to trust his or her employees, be mindful of an employee, particularly one with access to the company’s financial information, who often comes in early/stays late, takes on additional responsibility, rarely complains, earns management’s trust, is unusually attentive to customer complaints, and has personal financial troubles that are suddenly resolved.

The ACFE reports that tips make up 43.3% of detected fraud cases. Since most tips come from employees, vendors, customers and other sources close to the business, an easy way to help encourage suspicious activity reporting is to offer an anonymous, third-party reporting hotline.

Prevent It

Prevention is, of course, the best case scenario when it comes to fraud. Management and owners can help stop fraud before it starts by remaining aware, present and diligent:

• Run background checks prior to and during employment. Background checks are critical for employees obtaining positions of trust. Be mindful to have the potential employee sign a release form authorizing credit and background checks throughout the tenure of employment.
• Compel employees to take vacation. Having someone temporarily fill in for an employee is a good way to find suspicious activity.
• Pay attention to an employee’s changes in his or her personal and financial life. Note when an employee buys a new car, big house, etc. that seems inconsistent with their salary and general manner of living.
• Secure fidelity bonds on employees who are entrusted with money.
• Add an ethics policy and let employees know they will be prosecuted if they commit fraudulent acts.

Take a Hard Look

One of the hardest, yet most important, things to do in the prevention and detection of fraud is for business owners and management to look at themselves and how they run the business. Do we have the right policies in place? Are they clearly communicated to employees? What else can we be doing? Ask these 10 questions to begin reducing the risk of fraud:

1. When was the last time we reviewed our internal controls?
2. Are all of our employees bonded?
3. Are the volunteers who sign checks, transfer funds, or otherwise have
4. access to significant assets bonded?
5. Do we have a fraud policy statement in place?
6. Do our employees know what is expected of them ethically?
7. What procedures do we use when checking potential new hires?
8. Who is looking for unusual fluctuations in our financial records?
9. Do we keep an eye out for unusual employee behavior and dress?
10. When will we speak to our auditors next about our internal controls?
11. Do we have clear written policies and procedures for each staff position?
     

For more information, contact Keith Klodnick at kklodnick@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.

Posted by Randy Myeroff, CPA, President & CEO

You’ve got to think big to be successful. And sometimes that requires a broader perspective than what a typical day may offer. We all focus on core issues such as attracting and retaining talent, and anticipating customer needs. But sometimes we need to step back to observe the processes behind the business. If you took the roof off your company and studied the flow of people and/or materials, you would likely find obvious inefficiencies. Small adjustments could unlock great opportunities for better collaboration, communication and effectiveness. Stay focused on core business issues, but once in awhile, find that bird’s eye view where you can see things a bit more clearly.
 

The portion of healthcare reform legislation that would give employees at small businesses multiple options for healthcare via state exchanges has been delayed until 2015. Instead, only one option will be available in 2014. Read more in the alert provided by the OSCPA.

A recent class action lawsuit decided in Cuyahoga County Common Pleas Court found that the Ohio Bureau of Workers’ Compensation (BWC) overcharged a group of employers due to their exclusion or dismissal from the BWC’s group-rating program from 2001-2008. The affected group consists of more than a quarter of a million Ohio businesses.

The ruling requires the BWC to pay back the excessive premiums. While exact amounts are not yet known, initial estimations report the numbers could total hundreds of millions of dollars or more in restitution. Currently, the BWC is appealing the court’s decision, further delaying its re-payment of the premiums.

If you are one of Ohio’s businesses affected by this ruling, visit www.paynowbwc.com to learn more or to voice your concerns to the BWC.
 

Posted by Tom Bechtel, CPA

Making an acquisition or selling a company is as much a game of timing as it is anything else, and having the right fit at the wrong time is particularly frustrating. Generally, poor timing often boils down to one or more of the following constraints:

Funding Advanced Notice. While the credit freeze has started to thaw, it is difficult to rush a transaction through. Proper due diligence by the buyer and the bank or equity source is critical, especially when maximizing the use of leverage in an acquisition.

Seller Preparation. Private companies can be caught off guard by due diligence. Since many do not need to provide their financial information to financing sources or outside investors, statements may be prepared on another accounting method not in accordance with GAAP, interim reports can be irregular and certain activities may be driven primarily by tax benefits. Such practices are generally fine for a private company, but can lead to deals being delayed or halted due to the lack of understanding of results from the buyer’s perspective.

Strategic Priorities. From the buyers’ perspective, the deal just isn't really what they are looking for to achieve specific strategic objectives. From the seller’s perspective, there is too much anticipated growth to sell now. What do you do when faced with the right deal at the wrong time?

Be patient. Utilize quality advisors and give the other side time to prepare for due diligence.

Find solutions. If a seller wants to keep milking the “cash cow” for a few more years, offer insight as to the potential downside implications, particularly if the key owner does not have a solid succession plan. There may even be opportunities for a strategic partnership to better understand the value of aligning the two organizations.

Be flexible. Not every buyer/seller is going to fit with all the desired criteria. If the ideal isn’t there when desired, don’t ignore strategic priorities and take whatever is available.

The more prepared you are as a seller and the more qualified opportunities you have in your pipeline as a buyer, the better positioned you are to hedge against the timing issue that may hinder a great potential opportunity.

For more information, contact Tom Bechtel at tbechtel@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.