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PCORI Fee Due July 31

Posted 3:13 PM by

The Affordable Care Act created a fee called the Patient-Centered Outcomes Research Institute (PCORI) fee. This fee is to be used to fund research on medical treatment effectiveness. This fee is to be paid by both fully-insured and self-funded group health plans.

The fee is $2 per person enrolled in the plan. A person enrolled in the plan includes the participating employee, spouses, domestic partners and dependents. COBRA and retiree participants also must be counted. The fee is due based on the year-end of the plan. The filing will be due on or before July 31, 2014. The fee must be reported on IRS Form 720, “Quarterly Federal Excise Tax Return.”

If you are an employer with a fully-insured group health plan, no action is required as your health insurance carrier is required to report and pay this fee. This additional fee is most likely built into the premiums that you currently pay.

If you are an employer with a self-funded plan, you are responsible for calculating the fee, completing the Form 720 and paying the related fee.

The following plans are considered self-funded plans that are subject to the PCORI fee and the Form 720 filing requirement:

  • All self-funded group health plans, including Health Reimbursement Accounts (HRAs)
  • An HRA that is offered as part of a fully-insured group health plan – the fee is paid only on the HRA part of the plan
  • A stand-alone HRA plan
  • On-site medical clinics
  • Retiree-only group health plans
  • Employee Assistance Programs – only if the EAP provides significant medical benefits

The following plans are exempt from the PCORI fee:

  • Employee Assistance Programs – does not provide significant medical benefits
  • Individual Health Savings Accounts
  • Health and Dependent Flexible Spending Accounts
  • Stand-alone dental plans
  • Stand-alone vision plans

Upon determination that you have a self-funded plan, you must complete the IRS Form 720 (revised version dated April 2014). The form may be completed manually and mailed directly to the IRS (not required to be filed electronically). 

The fee is based on the average number of enrollees for the plan year. Most employers should be able to obtain this information directly from their benefit plan service provider(s). If you have to calculate the number of enrollees yourself, there are three methods that you may choose from in determining the average number of enrollees. The methods are as follows:

  1. The Form 5500 Method: If the plan is required to file Form 5500 and your 2013 Form 5500 is filed timely and before July 31, 2014, this method can be used. To use this method, add the number of participants at the beginning of the year (Part II, line 5 of Form 5500) to the total participants at the end of the year (Part II, line 6d) and divide the total by 2.Then multiply this total by $2.
     
  2. The Actual Count Method: This method uses the number of lives covered for each day of the plan year divided by the number of days in the plan year.
     
  3. The Snapshot Method: This method uses the total number of lives covered on a given date in each quarter of the plan year. The sum is then divided by 4.

The following sections of the Form 720 will need to be completed (assuming that the Form 720 is being filed only to report the PCORI fee):

  • Complete the top section of the form. The quarter ending is the second quarter, which is June 2014.
  • Go to Part II, line 133. The Applicable Self-Insured Health Plans line is going to be completed. In column (a), report the average number of lives covered. Multiply the number in column (a) by $2 and enter that amount. This calculated amount will also be entered in the tax column.
  • Go to Part III and enter the total tax on line 3. Show 0 on line 5 as no payments have been made towards this tax. Line 10 will show the amount due with the return.
  • Sign and date the return on the bottom of page 2.

The fee needs to be paid using the Electronic Federal Tax Payment System.

  • Mail the signed and completed Form 720 to:
    • Department of the Treasury
      Internal Revenue Service
      Cincinnati, OH 45999-0009
       
  • If you want to use FedEx, UPS or DHL, the address to send your return to is:
    • IRS Processing Center
      201 W. Rivercenter Blvd.
      Covington, KY 41011

The contents of this message are for informational purposes only. If you have any questions regarding the PCORI fee and filing requirement, please contact your benefit plan service provider or any of the following KSM advisors.

Patrick Brauer, Partner
317.844.4873         

Bernadette Fletcher, Director
317.580.2134

Karen Noel, Director
317.844.4879

Jolaine Hill, Director
317.580-2446

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IRS Notice 2014-21 on Virtual Currencies

Posted 8:33 PM by

The use of virtual currencies, especially Bitcoin, has increased significantly in recent years. This increased use has raised questions regarding the proper tax treatment of these currencies. In an attempt to clarify many of the uncertainties, the IRS has recently released Notice 2014-21, which provides answers for 16 frequently asked questions surrounding virtual currencies.

The IRS defines virtual currencies as digital representations of value that function as a medium for exchange, a unit of account, and/or a store of value. In other words, the virtual currency acts like “real money” even though it is not legal tender in any country or jurisdiction. A virtual currency is considered to be “convertible” if it has an equivalent value with an established currency, or if it can be easily substituted or exchanged for a legal tender. Bitcoin is probably the most well-known and widely used example of a convertible virtual currency today. Bitcoin can be easily traded and exchanged amongst users and can also be bought or sold for various real currencies, such as U.S. dollars and Euros. The IRS notice deals only with convertible virtual currencies and does not address any virtual currency which is not convertible.

In Notice 2014-21, the IRS starts off by stating that virtual currencies like Bitcoin are considered property, not currency, for tax purposes. Since virtual currencies are considered property, accepting virtual currencies in exchange for goods and services requires the recipient to measure their gross income by using the fair market value of the virtual currency in U.S. dollars as of the date payment was received. Additionally, when virtual currency is used to purchase an item, the taxpayer is required to report gain or loss on the disposition of the virtual currency. In order to do this, the taxpayer must first determine the basis of the virtual currency in U.S. dollars at the time of the exchange. The character of the gain or loss will be determined based on whether the virtual currency is held by the taxpayer as a capital asset. Therefore, if the taxpayer holds the virtual currency as an investment asset then it will be taxed as a capital gain or loss on its disposition. However, if the taxpayer holds the virtual currency as inventory then it will be taxed as ordinary income upon its disposition.

Some virtual currencies, such as Bitcoin, allow people to “mine” the currency. This involves users discovering new Bitcoins by solving complex math problems. When a taxpayer successfully mines virtual currency, the fair market value of the mined currency is includable in the taxpayer’s gross income for the taxable year. Furthermore, if the taxpayer is mining the virtual currency as part of a trade or business, the net earnings from the activity is considered self-employment income and is subject to the self-employment tax. Similarly, if a taxpayer is paid in virtual currency for services rendered as an independent contractor, the fair market value of the virtual currency received is subject to self-employment tax. In the case of an employer-employee relationship, the fair market value of the currency paid as wages to the employee is subject to federal income tax withholding, FICA tax and FUTA tax, and is required to be reported on Form W-2.

The IRS went on to state that when certain property payments which require information reporting to the IRS – such as rent, salaries, wages, premiums, annuities and compensation – are subject to the same information reporting standards when virtual currency is used to complete the payment. Furthermore, when a Form 1099-MISC is used to report payments of virtual currency, it should be reported using the fair market value of the virtual currency as of the date of the payment.

Finally, the IRS dictated that taxpayers who have not treated past virtual currency transactions in a manner that is consistent with Notice 2014-21 may be subject to penalties for failure to comply with tax laws. For example, underpayments attributable to virtual currency transactions and failure to report virtual currency transactions in a correct and timely manner may be subject to accuracy-related and information reporting penalties. However, the IRS does note that penalty relief may be available to taxpayers who can show that the underpayment or failure to properly file information on returns is due to reasonable cause. 

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Time is Running Out: Patient-Centered Outcomes Research Institute (PCORI) Fee Due July 31

Posted 9:05 PM by
The PCORI fee is due July 31, 2014, from health insurers and the plan sponsors of self-insured plans. The fee is paid annually using Form 720, Quarterly Federal Excise Tax Return. Please note that electronic filing is available, but not required. Payment will be due at the time the Form 720 is due.
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Proper Tax Treatment of Ambulatory Surgery Center Income - A Complicated Matter

Posted 9:53 PM by
How do you determine whether a physician's income from an Ambulatory Surgery Center (ASC) should be treated as passive income or active income on an individual income tax return? There is no one-size-fits-all answer to the question of how to treat ASC income, but below are some of the key issues to think about when considering whether ASC income should be passive or active.
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20 Year Tax Abatements – A Good Idea?

Posted 4:56 PM by
Things are transpiring fast and furiously at the Indiana State House. One possible spin-off of the current push to overhaul business personal property tax is to provide local governments the authority to award tax abatement up to 20 years. My first inclination when I hear a proposal like this is to consider whether it’s a good idea or a bad idea.
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Indiana EDGE Credit in Jeopardy

Posted 5:00 PM by
When it comes to the Indiana legislature, the conventional wisdom is that lawmakers are not inclined to take on too many big issues during a short legislative session (such as this year). Someone forgot to share that message with the only people who matter: Indiana legislators.
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How to Reconcile the Difference between Gross Receipts and Receipt Reported on Form 1099-K

Posted 7:56 PM by
With the start of tax-filing season, restaurant owners may have received (or should soon be receiving) IRS Form 1099-Ks from most of the Payment Processors they used during 2013. The Form 1099-K reports the gross proceeds received from Payment Processors, over the course of the year, which includes credit card companies, PayPal, Square, and similar organizations.
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Report Details Effects of Personal Property Tax Law Changes

Posted 1:00 PM by
As Governor Pence and members of the Indiana State legislature continue to tackle the issue of personal property taxes, the Indiana Fiscal Policy Institute recently released a report detailing both major and insignificant impacts of the tax. Specifically, the report claims that taxes on equipment have little effect on decisions for businesses to relocate to other states.
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Manufacturing Leads the Way for Indiana

Posted 2:49 PM by
The Indiana Manufacturers Association's (IMA) Legislative Briefing, held January 15, 2014, highlighted the success of the manufacturing industry in Indiana. Currently, manufacturing is leading the state in several  categories including: direct employment, gross state product, wages and benefits.
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State & Local Tax Update - 2/6/14

Posted 10:32 PM by

Personal Property Tax and 263(a)
For companies taking advantage of the new 263(a) rules for federal tax purposes, it is important to remember that for personal property tax purposes there may not be a de minimis safe harbor application. For income tax purposes it may be acceptable to expense individual fixed assets costing $5,000 or less; for personal property tax returns, these assets may still be considered assessable and taxable. If you choose to take advantage of the new 263(a) rules and expense assets costing $5,000 or less, you may want to consider keeping a second set of records for personal property reporting.

As a reminder, some states exempt personal property; however, many states do impose a personal property tax and due dates are fast approaching. Now is a good time to review your asset listing to ensure all personal property tax filing deadlines are met.
 
Feel free to reach out to your KSM advisor with any questions regarding the effect of Section 263(a) and personal property reporting.
 

Alabama Issues Guidance on Sales Tax Exemption for Government Contractors
A new sales and use tax exemption applies to the purchase of building materials, construction materials and supplies, and other tangible personal property that become part of a structure pursuant to a qualifying contract entered into on or after Jan. 1, 2014. Qualifying projects and contracts are those generally entered into with the following governmental entities: the State of Alabama, a county or incorporated municipality of Alabama, an Alabama public school, or an Alabama industrial or economic development board or authority already exempt from sales and use taxes. The Department cautions that contracts entered into with the federal government and contracts pertaining to highway, road or bridge construction or repair do not qualify for the exemption provided for in the Act. The Act requires the Department to issue a Form STC-1 (Sales and Use Tax Certificate of Exemption for Government Entity Projects) to all contractors and subcontractors working on qualifying governmental entity projects once a completed Form ST: EXC-01 is approved by the Department. Contractors and sub-contractors for qualifying projects will be required to file monthly consumers use tax returns and report all exempt purchases for ongoing projects, as well as all taxable purchases on one return. See Notice, Alabama Department of Revenue, 01/21/2014.

California Reminds of New 1031 Filing Requirements
Effective Jan. 1, 2014, a new annual filing requirement has been created for taxpayers who exchange property located in California for like-kind replacement properties located outside California. The new information return, referred to as a California 1031 Information Return, remains in development, but the Franchise Tax Board (FTB) has indicated that it intends to track the California sourced portion for the taxpayer's previously-deferred gain or loss when the non-California replacement property is ultimately sold, and such California sourced gain or loss that remains to be recognized by such taxpayers.

Some examples of specific information the FTB might request for each property and like-kind replacement property include: address or description of the property; parcel number, VIN, or HIN of the property; contract prices for each property and like-kind replacement property exchanged; California adjusted tax basis for each property; and debt amounts to which the exchanged properties were subject. See California FTB Tax News 12/01/2013.

Kentucky Will Not Allow CPA Representatives Before BTA
The Kentucky Board of Tax Appeals (BTA) recently announced that it will dismiss on its own initiative any petition of appeal filed by a non-lawyer on behalf of a legal entity or individual. Both court decisions and unauthorized practice of law opinions of the Kentucky Bar Association have ruled that non-lawyers may not represent legal entities or individuals in proceedings before administrative tribunals, including the BTA. An individual who is a non-lawyer cannot file a petition of appeal with the BTA on behalf of a legal entity or individual or otherwise represent that entity or individual in proceedings before the BTA. However, an individual may represent himself or herself in proceedings before the BTA concerning his or her own tax liability. See Kentucky Tax Alert 6, 11/01/2013.

Minnesota to Follow Federal Check-the-Box Rules
Effective for taxable years beginning after Dec. 31, 2012, for Minnesota corporate franchise tax purposes, the Minnesota Department of Revenue will follow elections made by eligible domestic and foreign entities pursuant to federal regulations § 301.7701-1 through § 301.7701-3. The Department had previously based its position regarding federal check-the-box classifications on Minnesota Revenue Notice 98-08, 05/26/1998, but a 2013 Minnesota law amendment made the policy statement regarding foreign eligible entities in that Revenue Notice obsolete. See Minnesota Revenue Notice 13-08.

North Carolina Issues Guidance on Taxability of Service Contracts
Effective Jan. 1, 2014, the 4.75% general state and applicable local and transit rates of sales and use tax apply to the sales price of a service contract sold at retail by a retailer, and sourced to North Carolina. "Service contract" means a warranty agreement, a maintenance agreement, a repair contract, or a similar agreement or contract by which the seller agrees to maintain or repair tangible personal property. Further, the sales price of a service contract on or after Jan. 1, 2014, by which the seller agrees to maintain or repair taxable prewritten computer software pursuant to the contract is subject to the 4.75% general state and applicable local and transit rates of sales and use tax. Prior to Jan. 1, 2014, the taxability of the sale of a maintenance agreement for taxable prewritten computer software is determined primarily on whether such software maintenance agreement is mandatory and therefore a part of the sales price of the sale of the computer software, or whether such sale is for an optional maintenance agreement. See North Carolina Directive SD-13-5.

Ohio Updates Individual Nexus Threshold
The Ohio Department of Taxation has modified its information release that describes the standards it will apply to determine whether a nonresident is subject to Ohio's personal income tax. Modifications to "safe harbor" activities include increasing the number of days that a nonresident may be present in the state from seven to 20 days, and increasing gross income earned in the state from $2,500 to $10,000. In such instances, nexus with a nonresident might exist, but the Department will not require the filing of a return and the payment of the personal income tax if a nonresident's only contacts with Ohio are limited to the contacts in the list. The modifications are effective for tax year 2014 and onward. See Ohio Tax Information Release PIT 2014-01.

There are many rules surrounding nonresident withholding and composite returns filed by PTEs. Evaluation of the rules and the overall tax picture of the PTE and its owners is critical to ensure proper compliance and reduce the state tax burden of the PTE owners.

 

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Practice. Donna provides a wide variety of tax consulting services in the areas of multistate sales and income taxes, business incentives, controversy services, and other state taxes.

 

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