Finally. For once in recent history we can talk about tax certainty as we head into year-end tax planning. The American Taxpayer Relief Act, passed in January, extended many key business and individual tax provisions through the end of this year – that’s the good news. Unfortunately, that act also added much more complexity to the tax code at a time when we thought the rules would be simplified. Nevertheless, we know the road ahead and should take advantage of every available opportunity.
Bonus depreciation and increased section 179 live on
Throughout 2013, businesses can benefit from 50% bonus depreciation and increased Section 179 expense, totaling $500,000 for 2013. This provides an opportunity to take advantage of bonus depreciation for qualified purchases made in 2013 that have a 20-year life or less. Keep in mind that bonus depreciation is not a guarantee for 2014. Section 179 expensing is available for all assets, new or used, but it will be reduced once additions exceed $2 million. Section 179 expense is scheduled to revert to $25,000 in 2014.
R&D – with a twist
Businesses that incur wages and supplies to improve an existing or develop a new process or product should consider the federal research and development credit, extended through the end of 2013. While there is strong government and business support for making the credit permanent, the $13 billion incurred every two years the credit is renewed has thus far created a roadblock to making that a reality. An alternative simplified calculation introduced in 2009 should provide more businesses the opportunity to claim the credit.
But don’t just count on the federal credit. In fact, many overlook a planning gem right in Ohio, which offers an R&D credit against the CAT tax. The Ohio credit is 7% of the excess of the current year R&D expense over the previous three-year average.
High earners pay higher price
The American Taxpayer Relief Act made the Bush-era tax cuts permanent for all individuals except those with taxable income of more than $400,000 per year ($450,000 for married filing jointly). These “high earners” are now subject to 39.6% tax on ordinary income and 20% on capital gains and qualified dividends. Some stealth increases resulting from the act, such as the return of the Pease Limit and Personal Exemption Phase- Out, will also add to the complexity for individual tax planning and will increase the taxes due.
Nuances of the 3.8% Medicare tax
Health care reform has applied a Medicare tax of 0.9% for earned income more than $200,000 annually ($250,000 per family) and an additional 3.8% Medicare surtax on net investment income, if modified adjusted gross income exceeds those levels.
The 3.8% surtax particularly creates an issue for taxpayers who receive net income from rent, which is considered net investment income and, therefore, is subject to the tax. Real estate professionals should look for further guidance under IRC 1411 to see if there is any opportunity to exclude this income under the trade or business exemption.
Ohio – Win some, lose some
Ohio’s biennial budget signed this summer created significant tax ramifications, both positive and negative, for individuals and businesses.
Retroactive from Jan. 1, 2013, individuals across the board will see a permanent, 10% reduction in their personal income tax rates phased in over a three-year period. Also retroactive as of Jan. 1, 2013, small business owners will benefit from the small business income deduction. The deduction applies to owners in partnerships, sole proprietorships, limited liability companies and S Corporations. Single or joint filers are able to deduct half of their business income up to $125,000. Married filing separate taxpayerscan deduct $62,500 each. This deduction helps to ease the disparity between C Corporations that don’t pay Ohio income tax and the owners of flow through entities who do.
However, Ohio also will experience some meaningful tax increases. Beginning Jan. 1, 2014, Ohio introduces its variable minimum CAT structure. The $150 minimum tax due on annual taxable gross receipts between $150,000 and $1 million will remain unchanged, but larger companies will pay more according to the new tiered structure that tops out at $2,600 in taxes on annual taxable gross receipts of more than $4 million. The tax increase is in addition to the 0.26% assessed on receipts over $1 million. This new structure will phase out the benefit of the first $1 million of gross receipts only being subject to the minimum tax.
Additionally, Ohio increased its statewide sales and use tax from 5.5% to 5.75%, which began Sept. 1, 2013. Sales and use tax will also now be applied to videos, music and ebooks transferred electronically as well as to certain magazine subscriptions.
Staying on top of the latest developments and collaborating with your colleagues and clients is the best way to identify new opportunities. Take advantage of the stable tax environment before uncertainty creeps back in for 2014.