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News Blog | 2012

Year-End Planning for Charitable Remainder Trusts and the 3.8% Net Investment

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Charitable remainder trusts (CRTs) might want to sell appreciated property before year-end to realize long-term capital gains in 2012 versus a later tax year. CRTs are generally not tax-paying entities. However, distributions from CRTs to CRT beneficiaries are taxable to beneficiaries to the extent of the CRT's current and accumulated income. If a CRT does not distribute all of its current income to the beneficiary, the excess is accounted for by the CRT as accumulated income and not currently taxed.

Distributions from CRTs to CRT beneficiaries may also be subject to the 3.8% surtax on net investment income (NII) for income realized in 2013 and later years. NII of a CRT beneficiary is the lesser of CRT distributions or the current and accumulated (after 2012) NII of the CRT. Income realized by a CRT in 2012 is not subject to the surtax, even if it is distributed to the CRT beneficiary after 2012. However, distributions of accumulated CRT income consist of post-2012 accumulated income first, and pre-2013 accumulated income second, for purposes of determining what income is NII and potentially subject to the surtax.

A CRT should wait until after 2012 to sell assets at a loss. Whether a CRT should sell appreciated assets before year-end depends on all of the facts and circumstances, such as the likelihood of the CRT beneficiary being subject to the 3.8% surtax. The surtax applies to joint filers with income over $250,000 or single filers with income over $200,000.

Contact your KSM advisor for more information.

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Survey Finds Indiana’s Manufacturers Ready to Compete

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Indianapolis, Ind. – The certified public accounting firm of Katz, Sapper & Miller LLP today released the results of their annual Indiana manufacturing survey. This study of small- to medium-size manufacturing companies was commissioned by Katz, Sapper & Miller and developed in partnership with Indiana University's Kelley School of Business – Indianapolis, Conexus Indiana, and the Indiana Manufacturers Association.

The results from this year’s survey, 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing, indicate that Hoosier manufacturers are stronger this year than at any point since the Great Recession, and are well positioned to compete in the coming years.

“Fundamental changes are continuing to take place across manufacturing in all kinds of capabilities,” said Scott Brown, partner-in-charge of Katz, Sapper & Miller’s Manufacturing and Distribution Services Group. “Businesses are starting to invest for growth, including facilities and automation, with an eye toward providing customers increasing quality at lower prices. While many Hoosier manufacturers have managed to survive the effects of the recession, challenges remain. Of course, not all manufacturers have found the perfect winning strategy, but many are heading in the right direction and some are excelling during these challenging times."

Other key findings reveal:

  • Hoosier manufacturers have largely shaken off the effects of the Great Recession and have stabilized their businesses. A significant majority of Indiana's manufacturers now report that their business is either "healthy" or "stable” with tougher times behind them.
  • Survey results indicate that the past's relentless rounds of downsizing are over, and while that approach worked well when mere survival was paramount, it is hardly a winning strategy for the future.
  • Many Hoosier manufacturers now recognize that the winning strategy is targeted investment aimed at growth. Over 70% of respondents reported that their goals were increasing investment in areas either essential for revenue growth, or across the entire business.
  • Indiana remains well positioned to lead American manufacturing. Hoosier manufacturers are highly competitive in a broad variety of industries and products, and, in fact, one in 10 of the companies in this survey are planning to open a new facility in Indiana in the near future.
  • A significant number of respondents report that they are onshoring manufacturing back to the United States. Indiana’s competitive advantage remains the fact that nowhere else in America allows manufacturers to position themselves closer to their customers and markets, or offers greater advantages in terms of suppliers, workforce quality, and transportation.
  • Successful manufacturers are continuing to rely on process improvement programs such as "Lean" and "Six Sigma" for implementing change, as well as increasingly taking advantage of advanced automation or smart manufacturing technologies to remain competitive.

Download the complete results of the 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing.

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About Katz, Sapper & Miller
As one of the top 100 CPA firms in the nation, Katz, Sapper & Miller has earned a reputation as a leader in the areas of accounting, tax and consulting services. Founded in 1942, the firm has more than 250 employees and is headquartered in Indianapolis, Ind. Katz, Sapper & Miller was named one of the “Best of the Best” accounting firms in the nation by INSIDE Public Accounting magazine and has been recognized by the Indiana Chamber of Commerce as one of the “Best Places to Work in Indiana” for seven consecutive years. The firm is an independent member of Nexia International, a leading global organization of independent accounting and consulting firms. Learn more at ksmcpa.com.

About the Kelley School of Business – Indianapolis
The IU Kelley School of Business has been a leader in American business education for more than 90 years. With an enrollment of more than 5,700 undergraduate and nearly 2,200 graduate students across two campuses, it is among the premier business schools in the country. Kelley’s Indianapolis campus, based at IUPUI, is home to the school’s Evening MBA, Master of Science in Accounting, and Master of Science in Taxation programs and a full-time undergraduate program. The part-time Evening MBA program is ranked ninth in the country by U.S. News and World Report. Learn more at kelley.iupui.edu.

About Conexus Indiana
Launched by the Central Indiana Corporate Partnership, Conexus Indiana is the state's advanced manufacturing and logistics initiative, dedicated to making Indiana a global leader. Conexus is focused on strategic priorities like workforce development, creating new industry partnerships and promoting Indiana's advantages in manufacturing and logistics. Learn more at ConexusIndiana.com.

About the Indiana Manufacturers Association
Formed in 1901, the Indiana Manufacturers Association is the second oldest manufacturers association in the country and the only trade association in Indiana that exclusively focuses on manufacturing. The Indiana Manufacturers Association is dedicated to advocating for a business climate that creates, protects, and promotes quality manufacturing jobs in Indiana. Indiana is one of the top manufacturing states in America in the wealth and jobs created, sustained, and supported. More than 50 percent of all employment in Indiana has some connection to manufacturing.

The staff of the Indiana Manufacturers Association has more than 160 years of combined governmental affairs experience and is recognized as experts in many areas, including tax, environment, labor relations, human resources, and healthcare. Learn more at imaweb.com.

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IRS Now Requesting and Examining Donor Acknowledgment Letters

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With the end of the year fast approaching, many organizations will be documenting contributions from their donors. In order for the donor to deduct the contribution, especially for contributions of $250 or more, documentation must be retained. The donor will require an acknowledgment letter from the organization. The Internal Revenue Service (IRS) is starting to request and examine these acknowledgment letters when auditing tax returns. Specifically, the IRS is looking for the language relating to any goods or services provided by the organization as well as substantiation of the actual donation.

For example, in Durden v. Commissioner, the taxpayer received an acknowledgment letter from their church that omitted the language related to goods and services provided. The IRS disallowed the taxpayer to receive credit for their contributions to the church stating that the acknowledgment letter received did not meet the criteria set forth in the statute.

For an acknowledgment letter to be considered valid, the following details must be included:

  1. The amount of cash and a description of property (but not the value) of any property other than cash contributed,
  2. Whether the organization provided any goods or services in consideration for the contribution, and
  3. A description and good faith estimate of the value of goods or services referred to in #2 above, or if such goods and services consist solely of intangible religious benefits, a statement to that effect.

For more information, contact your KSM advisor.

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IRS Announces 2013 Cost-of-Living Adjustments

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The IRS has announced the 2013 cost-of-living adjustments (COLAs) for retirement plans. Many of the limits pertaining to pension and other retirement plans are changed for 2013. Significant changes are as follows:

Elective Deferrals: The dollar limit for Section 401(k) plans, Section 403(b) plans and most 457 plans increase to $17,500 (up from $17,000), or $23,000 if over 50 and the plan adopts catch-up provisioning.

Defined Benefit Plan: The limitation on the annual benefit under a defined benefit plan is increased to $205,000 (up from $200,000). Plan provisions must preclude the possibility that any annual benefit that exceeds the limitations will be payable at any time. Further, the plan provisions (including the provisions of any annuity) generally must preclude the possibility that any annual benefit exceeding these limitations will be accrued, distributed, or otherwise payable in any optional form of benefit (including the normal form of benefit) at any time from the plan.

Annual Compensation Limit: The maximum amount of annual compensation that can be taken into account for various qualified plan purposes is increased to $255,000 (up from $250,000). For example, if an employer provides an annual contribution equal to 5% of salary under a qualified plan, an employee with a salary of $260,000 will have $12,750 contributed to his account ($255,000 * 5%).

Defined Contribution Plan: The limit on the annual additions to a participant's defined contribution account is increased to $51,000 (up from $50,000). The amount that can be allocated during a limitation year (typically the calendar year unless the plan provides otherwise) as an "annual addition" to a participant's account in a defined contribution plan is limited to the lesser of $51,000 or 100% of compensation.

IRA Contribution Limit: Increases to $5,500 (up from $5,000), or $6,500 if over 50 and the plan adopts catch-up provisioning. The due date for making a 2012 contribution is April 15, 2013. In order to make a contribution, the individual must have earned income and be under age 70 ½ at the end of the year.

SIMPLE Accounts: The maximum amount of compensation an employee may elect to defer for a SIMPLE plan is increased to $12,000 (up from $11,500), or $14,500 if over 50 and plan adopts catch-up provisions. An employer can either match employee elective deferrals dollar for dollar up to 3% of wages, or contribute 2% of wages (up to $255,000).

 

Standard Mileage Rates for 2013

The IRS has issued 2013 optional standard mileage rates used to calculate the deductible costs of operating automobile for business, charitable, medical or moving purposes. Beginning Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56.5 cents per mile for business miles driven
  • 24 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations
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Year-End Planning: Old Strategies May Result in Higher Overall Tax Burdens

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With the re-election of President Obama and the Democratic majority retained in the Senate, it is now more likely that certain tax benefits and lower rates set to expire on Dec. 31, 2012 will expire or be adjusted for higher income taxpayers.

The benefits of certain tax deductions or strategies may also be curtailed for certain taxpayers after 2012 as Congress looks for ways to increase revenues with or without tax rate increases. Read more.

Read the full text of The Advisor newsletter.

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State & Local Tax Update - 11/30/12

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Reassessment for Indiana Real Property Taxes: Indiana counties are currently wrapping up their 2012 statewide reassessments. During a reassessment year, county and township assessors are required to inspect all properties and adjust all assessed values to properly reflect market value in use. Counties were last required to reassess property in 2002; therefore, some property owners should expect significant changes as a result of the 2012 reassessment.

Property owners are encouraged to review their assessment notices (Form-11) as soon as they receive them to make sure the assessed value looks appropriate. The property owner has 45 days to file an appeal after the mailing of the first notice of assessment. When a property owner receives their tax bill, it is often too late to appeal the assessed value for that year. Some counties began mailing their assessment notices this month.

Contact your KSM advisor, or KSM property tax leader Chad Miller, as soon as you receive your Form-11. We would be happy to review the reassessed value of your commercial property to help you consider whether an appeal should be filed.

 

Indiana Updates County Income Tax Rate Notice: The Indiana Department of Revenue has updated its list of Indiana counties that have adopted county income taxes with resident and nonresident rate changes for Hancock County. The county income tax rates are effective for withholding purposes for periods beginning on or after Nov. 1, 2012. The rates apply to wages paid after Oct. 31, 2012, and the tax is withheld and paid at the same time and in the same manner as the state income tax. While this list is intended for those counties whose income tax rates are changed and effective Nov. 1, 2012, counties can elect to change their rates on Dec. 1. See Departmental Notice #1 for details of the county rates.

Indiana Issues Guidance on Ice Removal Services: A company's sales of its lawn-care and snow-removal services, which included labor charges and salt applications to remove ice on the ground, were unitary transactions and therefore subject to sales tax. The company has two categories of customers: The first category of customers supply salt/sand and the company only provides labor, while the second category of customers do not supply salt/sand; rather, the latter pays the company to plow snow and also remove ice using the company's materials when needed. The customers who supply salt to the company paid for labor charges only, and therefore the services provided were not subject to sales tax. However, the customers in the second category were charged one price per visit for ice removal that included both labor and materials (salt). When a combined, single charge for material and labor is invoiced as one amount it is considered a unitary transaction that is subject to sales tax. See LOF 04-20120031 for details.

Indiana Issues Sales Tax Guidance on Trade-ins: A company selling recreational vehicles, travel trailers, and parts was not subject to gross retail tax on the trade-in allowance deductions provided to customers who traded in a travel trailer to purchase an RV, or when a customer traded in an RV to purchase a travel trailer. Ind. Code § 6-2.5-1-5(b) provides that gross retail income does not include that part of the gross receipts attributable to the value of any tangible personal property received in a like-kind exchange in the retail transaction. A like-kind exchange means a motor vehicle traded for another motor vehicle or a trailer traded for another trailer. An exception exists for transactions where a motorized recreational vehicle is traded in for a non-motorized recreational vehicle, as in the above instance. The Indiana Department of Revenue considers the motorized and non-motorized recreational vehicles to be like-kind and therefore exempt from gross retail tax. However, transactions where the company accepted a boat as a trade-in for a motor home or a travel trailer did not qualify for the like-kind exchange treatment and were subject to gross retail tax. See LOF 04-20120348 for details.

Illinois Rules on Taxability of Guaranteed Payments: The Illinois Department of Revenue ruled that a taxpayer owes Illinois income tax as a partner receiving guaranteed payments from a partnership doing business in Illinois during the 2010 tax year. The department noted that guaranteed payments received from the partnership are ordinary income, which was characterized by the partnership as business income. Therefore, the amount of the guaranteed payment that was apportioned to Illinois by the partnership is taxable to the taxpayer by Illinois and subject to withholding. The department further noted their decision to follow other courts in determining that a partner in a partnership doing business in Illinois has sufficient nexus with Illinois to be subject to Illinois income taxation. See GIL IT 12-0028 for details.

Pennsylvania Rules on Taxability of Pallets: The Pennsylvania Supreme Court has affirmed a Commonwealth Court opinion, holding that the rental of wooden pallets used to transport manufactured paper products from the factory to the warehouse is not subject to sales and use tax. The Commonwealth Court held that a "container," while not defined by statute or regulation, is generally a receptacle that holds things within it, where as a pallet is merely the floor of container that is created by adding cardboard sheets, posts and stretch wrap. The Board argued that the Pennsylvania Supreme Court determined that pallets were containers in Commw. v. Yorktowne Paper Mills, Inc. , 426 Pa 18, 231 A2d 287 (1967). However, the question in that case was whether the lumber, nails and metal bands used to contain the materials on pallets were taxable, and the state high court determined that the entire unit (pallet with metal bands securing the product) constituted a taxable container. In this case, the only question was whether the pallets by themselves are taxable as returnable containers, and the Commonwealth Court determined that they are not. See Procter & Gamble Paper Products Co. v. Commw., Pa. Commw. Ct., (Oct. 16, 2012) for more information.

Wisconsin Rules on Personal Liability for Sales/Use Tax: The circuit court upheld a decision of the Wisconsin Tax Appeals Commission, finding that an owner of a used car dealership was personally liable for the company's unpaid sales and use taxes. There was substantial evidence to find the owner was liable under Wis. Stat. § 77.60(9) because all three elements required for personal liability were met. The petitioner was an owner of the dealership, and he opened the company's checking account and was the sole signatory for that account. The owner's control over the business and the checking account was sufficient to show that he had the authority to pay the sales taxes. The petitioner also had keys to the business and held himself out as a manager of the dealership, and he was aware that sales taxes were due on cars sold by the dealership. His position as owner and manager, and his knowledge that taxes were due along with his ability to pay those taxes establishes that the petitioner had the duty to pay the sales taxes. See Marxer v. Wis. Dept. Rev., (Sept, 26, 2012) for details.

For more information, contact Donna Niesen at dniesen@ksmcpa.com.

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Tax Court Validates Defined Value Clause for Interfamily Transfers

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In a big win for the taxpayer – and for estate and gift tax professionals – the Tax Court resoundingly rejected the Internal Revenue Service's (IRS) three arguments against defined value clauses, even in cases involving interfamily transfers. In its decision, the court also provided what amounts to a four-part "blueprint" for drafting successful formula clauses in the future. Read more

To read the full text of our Valuation Services Group newsletter, go here.

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The ESOP Opportunity for Trucking Companies

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Trucking company owners can use Employee Stock Ownership Plans (ESOPs) as part of their succession planning strategy. As a tax-advantaged alternative to third-party sales, a sale to an ESOP should be considered by trucking company owners assessing their succession planning options.

ESOP Sale Alternative

Having key managers and employees take over operations when the owners retire is appealing. However, since many of these key employees have limited capital to fund a management buyout, using an ESOP as part of this buyout structure can make the transaction possible.

An ESOP can borrow funds to acquire company stock, thereby financing a buyout in a more tax-efficient manner, since the ESOP compensation expenses recorded for employees allows for repayment of loans with pre-tax dollars.

Benefits of Sale to an ESOP

Federal tax code contains provisions that favor the sale of company stock to an ESOP. Shareholders who sell to an ESOP can defer capital gains tax payments on their proceeds, when following the guidelines set forth under Section 1042 of the Internal Revenue Code.

Additional tax advantages for companies exist, most notably for Sub-S corporations. The Sub-S corporation ESOP is not taxable on its share of corporate earnings. The taxes are deferred until employees take distribution from the plan upon retirement, death, disability or termination.

An ESOP can lead to the development of an employee-ownership culture, one that empowers and rewards employees for their efforts, by demonstrating the financial benefits of ownership and sharing company performance data in a way that emphasizes how each work group contributes to success.

Considering the ESOP Option

Trucking company owners invest decades of effort to build the value in their businesses. A liquidity event will eventually occur to provide for their retirement and estate planning needs. When trucking company owners are considering their succession plan options, an ESOP should be among the opportunities they consider. The ESOP opportunity could offer the “win-win” alternative for both owners and their employees.

For more information, please contact Tim Almack, partner-in-charge of KSM’s Transportation Services Group.

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IRS Guidance for Health FSAs

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Starting in 2013, there are new rules about the amount that can be contributed to health flexible spending arrangements (FSAs). Notice 2012-40 provides information about the new rules and flexibility for employers applying the new rules, and requests comments about other possible administrative changes to the rules on FSA contributions. In the Notice, the Internal Revenue Service (IRS) has provided clarity on how to implement the upcoming $2,500 limit on salary reduction contributions to health FSAs set by the Patient Protection and Affordable Care Act (PPACA).

The Notice, which was issued by the IRS on May 30, 2012, also provides the deadline (before the end of the 2014 plan year) for amending cafeteria plans to reflect this new limit. The Treasury Department and the IRS are considering modifying the “use-it-or-lose-it” rule that has long troubled health FSA participants.

Background

The PPACA affects health FSAs by adding Internal Revenue Code Section 125(i), which stipulates a $2,500 limit on salary reduction contributions to health FSAs effective for taxable years beginning after Dec. 31, 2012. The $2,500 limit will be indexed for inflation in future years. Through 2012, employees could establish their own limits as long as the limits were disclosed in the plan document. 

The PPACA requirements overlap with proposed cafeteria plan regulations that the IRS issued in 2007. These proposed regulations contain requirements regarding what must be included in a written cafeteria plan document. One requirement is to specify the maximum amount of salary reduction contributions that may be made to a health FSA. The proposed regulations generally require plan amendments to be adopted prior to the date when they become effective. The proposed regulations also contain the “use-it-or-lose-it” rule, which generally prohibits contributions under a health FSA from being used in a subsequent plan year or period of coverage. Failure to satisfy these rules would trigger disqualification of the entire arrangement resulting in adverse tax consequences. Plan sponsors must be aware of the impact the new guidance will have on their cafeteria plans and health FSAs.

Interpretation

The Notice clarifies how the new $2,500 limit will operate. It specifies that the “taxable year” described under the PPACA provision means the plan year and not the taxable year of the plan sponsor. The $2,500 limit on health FSA salary reduction contributions will apply on a plan year basis effective for plan years beginning after Dec. 31, 2012.

The Notice also addresses operational issues in dealing with the $2,500 limit. First, if a plan provides a grace period (i.e., participants in a calendar year health FSA have until March 15 of the following plan year to incur expenses and get reimbursements), unused salary reduction contributions carried over into the next year would not count against the $2,500 limit for the subsequent year. Not all health FSA plan documents contain this provision and a plan sponsor cannot apply this operational rule unless it is in the plan document.

Second, the Notice provides guidance as to how employer non-elective contributions, sometimes referred to as flex credits, are to be accounted for in dealing with the $2,500 limit. If such flex credits must be used for a qualified benefit such as a health FSA, the participant may still elect to make a salary reduction contribution of $2,500. However, if the flex credit may be used for the qualified benefit or cashed out, those flex credits will be treated as a salary reduction contribution and, as a result, will impact the amount of salary reduction contribution that a participant may make.

Third, the Notice provides relief and the opportunity for correction in the event that salary reduction contributions exceed the $2,500 limit, and if it was the result of a reasonable mistake and not due to the employer’s neglect.

Request for Comments -- Use-It-or-Lose-It Rule

The IRS specifically requested comments in the Notice on the use-it-or-lose-it rule under the proposed regulations. The IRS and the Treasury Department are considering modification of the use-it-or-lose-it rule.  The comment period ended Aug. 17, 2012 and may result in the liberalization of the use-it-or-lose-it rule.

Conclusion

Notice 2012-40 provided some needed guidance in dealing with the new $2,500 limit for health FSAs. Due to the delayed plan amendment requirement and outstanding final cafeteria plan regulation, plan sponsors have generally been waiting before taking action with respect to their plan documents. However, plan sponsors must be ready to comply from an operational perspective in 2013. Because many cafeteria plans are operated on a calendar year basis, this will require action in late 2012 to ensure that plan participants are notified of the changes and plan operations are updated accordingly.

The contents of this message are for informational purposes only. If you have any questions regarding Notice 2012-40 and its impact on your health FSA, please contact any of the following members of our Employee Benefit Plan Services Group.

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Recent Developments in Accounting Standards

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FASB Issues Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The objective of the amendment is to help simplify the impairment testing and to improve consistency in impairment testing of indefinite-lived intangible assets other than goodwill, such as licenses, distribution rights and trademarks. 

Previously, a company had to perform an annual impairment test of an indefinite-lived intangible asset by comparing the fair value of the asset to its carrying amount on the books. If the fair value was determined to be below the carrying amount, then an impairment loss was recognized in the amount of the excess cost over fair value.

Under this update, a company now has the option to perform a qualitative assessment first to determine whether a quantitative assessment of fair value would be needed. If the company’s qualitative assessment determines that it is "more likely than not" that the indefinite-lived asset is impaired, then the company is required to perform the qualitative assessment. If it is determined that the indefinite-lived asset is not "more likely than not" to be impaired, then the company is able to stop its assessment at that point.

The amendments in this update permitting a company to assess qualitative factors is similar to the amendments for goodwill impairment testing contained in ASU No. 2011-08.

ASU No. 2012-02 applies to all entities with long-lived intangible assets and is effective for fiscal years beginning after September 15, 2012. Early adoption is permitted.

 

FASB Issues Accounting Standards Update No. 2012-05, Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows

The FASB issued Accounting Standards Update No. 2012-05, Statement of Cash Flows (Topic 230): Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows on October 22, 2012. The update sets forth guidance on the classification of cash receipts from the sale of certain donated financial assets, such as investment securities, in the statement of cash flows. Prior to this ASU, Not-for-Profit (NFP) entities would classify these cash flows as either investing cash flows or as either operating or financing cash flows dependent upon how they classified cash inflows resulting from cash contributions.

Under this update, NFPs will classify the cash receipts from the sale of donated financial assets consistent with where the NFP classifies its cash donations received when the sales of the financial assets donated is nearly immediately converted to cash without any NFP-imposed limitations for the sale. Under this scenario, the cash flows would be recorded as an operating cash flow, as long as there is no donor restricted use imposed for long-term purposes. If there is a restriction imposed for the use for long-term purposes, then the cash receipts should be classified in financing activities. If the financial assets are not nearly immediately converted to cash, then at the time a sale does occur, the cash inflows will be classified as cash flow from investing activities for the NFP.

ASU No. 2012-05 is effective prospectively for fiscal years, and interim periods within those years, beginning after June 15, 2013. Retrospective application to all prior periods presented upon the date of adoption is permitted.

 

FASB Issues Proposed Accounting Standards Update, Comprehensive Income (Topic 220): Presentation of Items Reclassified Out of Accumulated Other Comprehensive Income

The FASB issued a proposed accounting standard update on August 16, 2012, related to the presentation of amounts that are reclassified out of accumulated other comprehensive income (AOCI). The full proposed ASU can be found on the FASB site.

The proposed update does not change the reporting of other comprehensive income but would require enhanced disclosures to present separately by component reclassification out of AOCI. A tabular presentation related to amounts reclassified out of AOCI for items required under U.S. GAAP to be reclassified directly to net income in their entirety would be required. For items not required under U.S. GAAP to be reclassified directly to net income in their entirety, the tabular disclosure would only include a cross-reference to other disclosures for those items. The updated presentation is designed to help provide a better reference to other disclosures that have additional information related to amounts reclassified out of AOCI. The proposed change is due to the FASB's cost/benefit analysis of its issuance of ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which was designed to increase the prominence of other comprehensive income in the financial statements.

The amendments in this proposed update would apply to all companies that issue financial statements in accordance with U.S. GAAP and that report items of other comprehensive income. The effective date will be determined after the FASB considers the feedback from the proposal.

 

American Institute of Certified Public Accountants Has Proposed a Financial Reporting Framework for SMEs

On November 1, 2012, the American Institute of Certified Public Accountants (AICPA) released for public comment the exposure draft Proposed Financial Reporting Framework for Small- and Medium-Sized Entities. The proposed Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) is designed for privately owned, for-profit entities that are not required to produce financial statements in accordance with U.S. GAAP.

The proposed FRF for SMEs is a special purpose framework (formerly referred to as other comprehensive basis of accounting) intended for use by privately-held small- to medium-sized entities in preparing their financial statements. The proposed FRF for SMEs follows the general principal that historical cost is the most useful measurement basis for the users of SME financial statements and the most cost-beneficial approach for management.

Some of the key features of the proposed framework include the following:

  • Historical cost is the primary measurement basis
  • Closely aligned with the accrual basis of accounting
  • Disclosures are reduced, while still providing users with the relevant information
  • Familiar and traditional accounting methods are used
  • Adjustments needed to reconcile tax return income with book income are reduced
  • Principal-based framework, usable across industries by incorporated and unincorporated entities
  • Only financial statement matters that are typically encountered by SMEs are addressed in the framework

The FRF for SMEs is not proposed as an authoritative document, and the AICPA would have no authority to require the use of the FRF for SMEs. Use of the FRF for SMEs would be a choice made by management of the entity after considering the users of the financial statements.

Currently, the AICPA is asking for comments on the proposed framework. The comment period ends January 30, 2013. The AICPA has a resource page that provides additional information on the proposed FRF for SMEs:

http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/PCFR/Pages/Financial-Reporting-Framework.aspx

The AICPA anticipates issuing a final framework in the first half of 2013.

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Tax Laws Expiring in 2012

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With the re-election of President Obama and the Democratic majority retained in the Senate, it is now more likely that certain tax benefits and lower rates set to expire on December 31, 2012, will expire or be adjusted for higher income taxpayers. Additionally, the benefits of certain tax deductions or strategies may be curtailed for certain taxpayers after 2012 as Congress looks for ways to increase revenues with or without tax rate increases.

What does this mean for tax planning? Although uncertainties exist, the following items should be considered – alongside careful consultations with your KSM advisor – before year-end:

  • Accelerating income into 2012, including exercising stock options, accelerating bonus or other compensation/business receipts, recognizing capital gains and triggering passive activity capital gains
  • Converting regular IRAs to ROTH IRAs
  • Deferring capital losses
  • Distributing C corporation earnings and profits from current or former C corporations
  • Deferring business deductions/payment of payables for cash method taxpayers
  • Accelerating capital asset purchases to take advantage of bonus depreciation and a higher Section 179 provision
  • Maximizing availability of tuition credits for higher education expenses
  • Reviewing the tax savings associated with accelerating deductions such as charitable contributions or state tax payments that may be limited in future years
  • Electing to pay taxes on installment sales arising in 2012 or "disposing" of existing installment receivables to accelerate recognition to 2012
  • Reviewing business structures with carried interest considerations
  • Reviewing business activity groupings to minimize net passive income subject to new 2013 Medicare tax
  • Assessing impact of Obamacare on employee health and welfare plans
  • Shifting investment or passive income to family members with adjusted gross income of less than $200,000
  • Accelerating succession planning via sales and gifting strategies
  • Making large gifts outright or in trust to utilize higher gift and GST exemptions available in 2012
  • Establishing short-term Grantor Retained Annuity Trusts

Tax laws set to expire or take affect January 1, 2013, include:

  • The reduction of alternate minimum tax (AMT) exemption to tax year 2000 amounts of $33,750 single and $45,000 married, which will create additional taxes for many unsuspecting taxpayers.
  • Self-employment income and wages that exceed $200,000 single and $250,000 married will be subject to 0.9% additional Medicare tax.
  • A 3.8% additional Medicare tax will be imposed on higher income taxpayers on the lesser of net investment/passive income or the amount their AGI (adjusted gross income) exceeds greater than $200,000 single and $250,000 married.
  • Dividends will begin being taxed at ordinary rates (same rate as wages and interest) instead of the capital gain rates.
  • 0% capital gain rates for taxpayers in the two lowest brackets (10% and 15%) will expire.
  • The maximum capital gain rates will increase from 15% to 20%.
  • The child tax credit will decrease from $1,000 per qualifying child to $500.
  • Itemized deduction and personal exemption phase-outs will return.
  • The college tax credit will reduce from a maximum of $2,500 a year per person to $1,500.
  • Tax rates will increase (see marginal rate table below).
Rates
201210%15%25%28%33%35%
201315%15%28%31%36%39.6%
  • Bonus depreciation will expire.
  • Section 179 (capital asset expensing election) will drop from $139,000 in 2012 to $25,000 in 2013.
  • The $5.1 million tax-free estate tax limitation will decrease to $1 million.

Contact your KSM advisor for more information.

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Indiana Tax Court Case on Transportation Exemption

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On October 30, 2012, the Indiana Tax Court issued a decision affecting public transportation companies. Indiana law provides a sales and use tax exemption on the purchase of tangible personal property directly used in providing public transportation. In Wendt LLP v. Indiana Department of State Revenue, the court examined the aspects of Wendt's business that qualified for the exemption. Wendt, an Indiana-based company in the business of intrastate, interstate, and international relocation of oversized factory equipment, claimed that the exemption applied to a wide range of its business, including the tangible personal property used to:

  • Provide quotes to prospective customers;
  • Disassemble the equipment to be transported and installed;
  • Transport the equipment;
  • Reassemble and re-install the transported equipment at the new location; and
  • Temporarily store property being transported through the process.

The court took a slightly more narrow view, finding that the disassembly, transportation and temporary storage of property were all part of the exempt transportation process, but that providing quotes (sales activity) and re-installation of the transported property did not qualify for the exemption.

While every court decision is fact-sensitive, this case generally serves to reinforce some of the underlying fundamentals of this exemption and how it has been applied for many years. Two areas worth additional attention are:

  1. The court finding that temporary warehouse storage is considered part of the exempt transportation function
  2. The court's determination that the re-installation of transported property is outside of the exemption

If your company provides public transportation services for numerous customers or operates an exempt captive company that transports primarily for its parent company, this case could impact you.

For more information, contact Donna Niesen, director in KSM's State and Local Tax Practice, at 317.580.2047 or dniesen@ksmcpa.com.

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IRS Announces Retirement Plan Limitations for 2013

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The Internal Revenue Service (IRS) recently announced the annual Cost-of-Living Adjustments (COLA) for retirement plans and related limitations for the 2013 tax year. Several of the following limits have changed for 2013 compared to the 2012 limits.

 2013 

2012

Social Security Taxable Wage Base

$113,700 

$110,100

Medicare Taxable Wage Base

No Limit

 

No Limit

Compensation (Plan Limit)

$255,000 

$250,000

Compensation (SEP)

$550 

$550

Defined Benefit Limit (415)

$205,000

 

$200,000

Defined Contribution Limit (415)

$51,000 

$50,000

401(k) and 403(b) Contribution Limit

$17,500 

$17,000

401(k) and 403(b) Catch Up Contribution Limit (over age 50)

$5,500 

$5,500

SIMPLE Contribution Limit

$12,000 

$11,500

SIMPLE Catch up Contribution Limit (over age 50)

$2,500 

$2,500

Highly Compensated Employee Definition (prior year)

$115,000 

$115,000

Maximum Deduction (% of Compensation) P/S and SEP Plans

25% 

25%

IRA Contribution Limit (Traditional & Roth)

$5,500 

$5,000

IRA Catch Up Contribution Limit (Over Age 50)

$1,000 

$1,000


For questions regarding your retirement plan, please contact any of the members of our Employee Benefit Plan Services Group.

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State & Local Tax Update - 10/15/12

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Reassessment for Indiana Real Property Taxes: Indiana counties are currently wrapping up their 2012 statewide reassessments. During a reassessment year, county and township assessors are required to inspect all properties and adjust all assessed values to properly reflect market value in use. Counties were last required to reassess property in 2002; therefore, some property owners should expect significant changes as a result of the 2012 reassessment.

Property owners are encouraged to review their assessment notices (Form-11) as soon as they receive them to make sure the assessed value looks appropriate. The property owner has 45 days to file an appeal after the mailing of the first notice of assessment. When a property owner receives their tax bill, it is often too late to appeal the assessed value for that year. Some counties began mailing their assessment notices this month.

Contact your KSM advisor, or KSM property tax leader Chad Miller, as soon as you receive your Form-11. We would be happy to review the reassessed value of your commercial property to help you consider whether an appeal should be filed.

 

Indiana Updates County Income Tax Rate Notice: The Indiana Department of Revenue has updated its list of Indiana counties that have adopted county income taxes with rate changes for Carroll, Hancock, Perry and Starke counties. The county income tax rates are effective for withholding purposes for periods beginning on or after Oct. 1, 2012. The rates apply to wages paid after Sept. 30, 2012, and the tax is withheld and paid at the same time and in the same manner as the state income tax. While this list is for those counties whose income tax rates are changed and effective Oct. 1, 2012, counties can elect to change their rates Nov. 1 and Dec. 1. See Departmental Notice #1 for current rates.

Indiana Rules on Intangible Expense Add Back for LLC: A limited liability company (LLC) did not meet the statutory definition of an includable corporation, nor was it considered a member of an affiliated group; therefore, the intangible expenses paid, accrued and incurred by the LLC are not included in the add-back calculations provided by the statute. Ind. Code § 6-3-2-20(b) requires a corporation subject to the adjusted gross income tax to add to its taxable income intangible expenses and any directly related intangible interest expenses paid, accrued, or incurred with one or more members of the same affiliated group. IRC Sec. 1504 defines an affiliated group as one or more chains of includible corporations connected through stock ownership with a common parent corporation, which is an includible corporation. The LLC is treated at the federal level as a partnership, not as a corporation, and is neither an "includable corporation" nor a member of the "affiliated group" as defined by IRC Sec. 1504. Since it is not a member of the affiliated group, the intangible expenses paid, accrued or incurred by the LLC are not included in the add-back calculations under Ind. Code § 6-3-2-20. See LOF 02-20110459 for details.

California issues Guidance on Throwback Rule: The Franchise Tax Board has issued a ruling indicating that a California corporation (filing a combined return) that sells tangible personal property (TPP) in all 50 states and several foreign jurisdictions does not have to throw back TPP sales to the California sales factor when it has more than $500,000 in TPP sales in a jurisdiction because it would be taxable in such jurisdiction under Cal. Rev. & Tax. Cd. § 25122. See 2012-3 for details of the ruling.

California Increases Penalty for Non-filing LLCs: L. 2012, A318 (c. 313), effective Jan. 1, 2013, extends the penalty provisions of Cal. Rev. & Tax. Cd. § 19135 to foreign limited liability corporations. Under § 19135, a penalty of $2,000 per taxable year is assessed whenever an entity is doing business in California, within the meaning of § 23101, and fails to make and file a return within 60 days after the Franchise Tax Board sends the taxpayer a notice and demand to file the required tax return, unless the failure is due to reasonable cause and not willful neglect.

California Issues Decision in Gillette Case: In its opinion on rehearing, the California Court of Appeal ruled that multistate taxpayers could elect to use the Multistate Tax Compact's equally-weighted three-factor formula to apportion and allocate income for state corporation franchise (income) tax purposes for the tax years at issue. Although the court had vacated its previous decision, its opinion on rehearing also concludes that the compact was a valid multistate compact, and California was bound by it and its apportionment election provision for the tax years at issue because California had not repealed former Cal. Rev. & Tax Cd. § 38001 et seq. and withdrawn from the compact during the period in question. Although the legal reasoning of the opinion on rehearing is substantially similar to that of the vacated decision, the opinion on rehearing includes language clarifying that legislation enacted by California after oral argument in the case repealed the Compact, effective June 27, 2012. For details of this case, see Dkt. No. A130803A.

Iowa Issues Sales Tax Sourcing Guidance: Effective Oct. 10, 2012, The Iowa Department of Revenue has adopted new rules (Reg. 701-223.1 through 701-223.4) regarding sourcing sales of services that are taxable in Iowa under the Streamlined Sales and Use Tax Act. The new chapter defines relevant terms, clarifies and provides examples of where sale of services performed on tangible personal property should be sourced, and clarifies and provides examples of where a sale of personal care services should be sourced.

Kentucky Offers Amnesty Program: From Oct. 1 to Nov. 30, 2012, the Kentucky Department of Revenue is offering an amnesty program to eligible taxpayers. In exchange for coming forward and paying outstanding liabilities, taxpayers will be relieved of any penalties and one-half of the interest due. More information regarding the application process and eligible taxes can be found at www.amnesty.ky.gov/.

North Carolina Rules on Responsible Person: The taxpayer, a manager of a limited liability company, was personally and individually liable for payment of the LLC's sales and use tax, penalty and interest for the period at issue because the taxpayer was a responsible person. Statutory law provides that a manager of an LLC is a responsible person for an LLC, and the manager is not required to be assigned any specific tasks to be held liable as a responsible person. In this case, the taxpayer was appointed as one of two managers of an LLC; the LLC's operating agreement specifies that the taxpayer shared the management of the LLC equally with another person; the LLC's annual report identifies the taxpayers as a manager of the LLC; and the minutes of board meetings demonstrate that the taxpayer served as one of two managers from March 2008 until he became sole manager in January 2010. Although the taxpayer contended that he did not have check-signing authority, specific financial duties assigned to managers are not relevant to a manager's status as a responsible person. In addition to being a responsible person as manager, the taxpayer was a responsible person based on his duty to pay sales tax imposed by a provision contained in the LLC's operating agreement, which required managers to file and pay the taxes for any federal, state or local tax returns required to be filed by the LLC. (George S. Goodyear, III v. N.C. Dept. of Rev., N.C. Dept. of Rev., Final Agency Decision No. 11 REV 13094, 09/18/2012.)

Washington B&O Nexus Created by Independent Contractors: An out-of-state provider of continuing professional education had nexus and was subject to business and occupation tax because its independent contractor speakers were representative third parties. The taxpayer, which did not have any employees in Washington, contracted with speakers to make presentations at live seminars for the taxpayer's customers in Washington. Nexus is created when a taxpayer is engaged in activities in Washington, either directly or through a representative, for the purpose of performing a business activity; the independent contractor speakers provided services on the taxpayer's behalf directly to the taxpayer's customers, the seminar attendees, and consequently were "representative third parties." The Department of Revenue rejected the taxpayer's contention that it merely purchased services from contractors; the speakers did not perform services directly for the taxpayer, but rather, delivered the services that the taxpayer was in the business of providing. See Tax Determination 11-0292 for details.

For more information, contact Donna Niesen at dniesen@ksmcpa.com.

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The Value of Donated Property Is in the Eye of the Marketplace

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Nonprofit organizations often struggle with valuing noncash and in-kind donations, including the value of houses or other buildings. Whether for recordkeeping purposes or when helping donors understand proper valuation for contributed property, the task is not easy.

Although the amount that a donor can deduct generally is based on the fair market value (FMV) of the property at the time of contribution, there is no single formula for calculating FMV for every type of gift. Read more.

To read the full text of our Profitable Solutions for Nonprofits newsletter, go here.

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How to Locate Missing 401(k) Plan Participants

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Do you know where all of all of your plan participants are? Terminated participants in a retirement plan can cause plan sponsors to incur additional time and fees, long after they are terminated, if their balance remains in the plan. With today’s requirements for annual fee disclosures, a plan sponsor is responsible for continuing to provide terminated participants with annual disclosures and statements. Also, terminated participants with a balance drive up the participant count, which may result in increased per participant charges and even contribute to the requirement of an annual independent audit of the plan.

It is always a good idea to provide participants with paperwork to request their distribution immediately after they leave employment. If participants have a large enough balance, you will not be able to force them to take a distribution. However, smaller balances may be forced out of the plan while you still have contact with the participant.

One of the most common reasons terminated participants remain in the plan is that the plan sponsor is eventually unable to locate the participant. In this case, there are procedures to follow to help you locate the participant, document your efforts in case of failure, and handle the participant’s remaining balance.

As a fiduciary of a retirement plan, your company has a responsibility to search for all terminated participants with a balance in the plan. Finding missing participants can be a difficult task to accomplish and it only grows more onerous with the passage of time. However, employers must make a reasonable effort to locate a participant; and the sooner you begin the process the more likely you will succeed.  

As a first step, if mail that was sent to a terminated participant is returned as undeliverable, resend the letter/package through certified mail to create a record of your attempt to locate the participant. Also document for your records your effort to contact the participant through:

  • Other employees who may still know how to reach them
  • Beneficiaries and emergency contacts listed in the plan and other company records, such as the health plan

If unsuccessful in maintaining contact, below are a few additional options that may be beneficial:

  • The National Registry – This is a website that allows employers to list names of missing plan participants who have unclaimed retirement benefits. Individuals who believe they have unclaimed retirement accounts can search using their Social Security Number (SSN) for a match. If there is a match, the participant is asked to provide contact information.

https://www.unclaimedretirementbenefits.com/

  • Search Firms – There are numerous search firms who will search for participants based on a last known address and SSN. There is a fee involved for this option that will vary from company to company. Several of these search firms can be found on the Internet. This will save you from using internal resources to conduct the search.
  • Internet Searches – Internet searches, including Facebook and LinkedIn, can prove to be effective. There are both free and fee-based sites. The following are free sites:

www.theultimates.com/white
www.infousa.com

Note that as of August 2012, the Internal Revenue Service discontinued its letter forwarding program and no longer forwards letters on behalf on plan sponsors or administrators to missing former plan participants.

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2012 Gift Planning - Time Is Running Out!

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The gift, estate and generation-skipping transfer tax exemptions are currently $5.12 million for transfers made through the end of 2012. Unless Congress takes action otherwise, the exemptions revert back to $1 million in 2013. Before 2011, the gift tax exemption was only $1 million. This means that taxpayers can gift up to $5.12 million, less whatever portion of their exemption they have used in prior years, gift-tax free in 2012. For example, if a taxpayer used his $1 million gift tax exemption in prior years, he would still be able to gift up to $4.12 million in 2012, gift-tax free. The exemptions are $5.12 million per person or $10.24 million per married couple.

Thus, now is an excellent time for taxpayers to consider making gifts. When a taxpayer makes a gift, this not only gets the value of the gifted property out of the taxpayer's estate for estate tax purposes, but it also gets the appreciation on the gifted property out of the taxpayer's estate for estate tax purposes. Plus, this opportunity may be short-lived depending on what happens to the law after 2012. If the exemption amount decreases next year, as it is scheduled to do, taxpayers will have lost an opportunity to pass wealth down to their heirs (or to trusts for their heirs) gift- and estate-tax free.

Many taxpayers may not feel comfortable making large gifts now. Using a trust that can benefit a spouse may give them the comfort they need. However, trusts for spouses can have traps for the unwary. Alternatively, they may want to use at least some of their $5.12 million exemption, or perhaps one spouse may want to use his or her exemption even if the other spouse doesn't use any of his or her exemption.

Taxpayers should carefully consider whether or not to use their gift tax exemptions by making gifts in 2012.

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State & Local Tax Update - 9/17/12

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Reassessment for Indiana Real Property Taxes: Indiana counties are currently wrapping up their 2012 statewide reassessments. During a reassessment year, county and township assessors are required to inspect all properties and adjust all assessed values to properly reflect market value in use. Counties were last required to reassess property in 2002; therefore, some property owners should expect significant changes as a result of the 2012 reassessment.

Property owners are encouraged to review their assessment notices (Form-11) as soon as they receive them to make sure the assessed value looks appropriate. The property owner has 45 days to file an appeal after the mailing of the first notice of assessment. When a property owner receives their tax bill, it is often too late to appeal the assessed value for that year. Some counties began mailing their assessment notices this month.

Contact your KSM advisor, or KSM property tax leader Chad Miller, as soon as you receive your Form-11. We would be happy to review the reassessed value of your commercial property to help you consider whether an appeal should be filed.

 

Alabama Issues New Rules on Sales Factor: Effective for tax years beginning after December 31, 2010, the Alabama Department of Revenue, has adopted Ala. Admin. Code § 810-27-1-4-.09.01 and 810-27-1-4-.17 regarding the apportionment factor. The adopted rules indicate that Alabama uses a double-weighted sales factor in the three-factor apportionment formula. The rules also provide that for taxpayers with a business interest in an unincorporated entity, the apportionment formula must include the pro rate share of the unincorporated entity's factor data. In addition, the rules address the new market-based sourcing methodology used to source sales other than sales of tangible personal to Alabama. Under the act, gross receipts from sales that do not involve tangible personal property are considered to be in Alabama if the taxpayer's market for the sale is in Alabama.

Georgia Issues Guidance on Pass Through Entity Withholding: Effective September 2, 2012, the Georgia Department of Revenue has adopted amendments to Rule 560-7-8-.34 to conform the regulation with current state law and clarify provisions. Among other changes:

  • An entity is required to include guaranteed payments as part of its taxable income sourced to Georgia;
  • The term "entity" does not include a Subchapter "S" corporation that is treated as a "C" corporation for Georgia purposes;
  • Estimated tax payment dates for entities that file a composite return are made the same as for individuals;
  • A fiscal year entity is required to adjust its estimated payment dates and extension dates as if it were an individual filing a fiscal year return;
  • It is clarified that the 4% withholding is required with respect to the nonresident member's share of taxable income sourced to Georgia; and
  • The filing of estimated tax payments by the member does not relieve the entity from the responsibility of the withholding requirement.

Michigan Tribunal Rules on Discharge of Single Business Tax Under Bankruptcy : A taxpayer's assessment for a company's unpaid single business tax (SBT) as a corporate officer was not dischargeable in bankruptcy because it was a non-dischargeable excise tax under 11 U.S.C. § 507(a)(8)(E). The SBTs at issue arose from the business activity of a limited liability company, of which the taxpayer was an manager or member. The return date for the taxes at issue was more than three years before the date of the filing of the taxpayer's petition in bankruptcy, which would mean the taxes would be dischargeable under 11 U.S.C. § 507(a)(8)(E) unless they were an excise tax on a transaction. The SBT is a tax upon the privilege of doing business that is measured by the "adjusted tax base" of persons with business activity in Michigan. The SBT cannot be substantially distinguished from the Texas franchise tax, which a federal bankruptcy court has held to be a privilege tax on a transaction. In addition, a federal district court in Michigan, Quiroz v. State , U.S. Dist. Ct., E.D. Mich., Dkt. No. 11-CV-12672, 03/27/2012 , has held that an officer liability assessment arising from a corporation's failure to pay SBT was a debt for a non-dischargeable excise tax on a transaction under 11 U.S.C. § 507(a)(8)(E). Although the Tribunal was asked to determine whether the taxpayer's officer liability fell within the scope of a federal bankruptcy discharge of 11 U.S.C. § 523(a) issued by the U.S. Bankruptcy Court for the Southern District of Florida, the Tribunal found that the Florida bankruptcy court would have come to the same conclusion as the court in Quiroz . In addition, while the taxpayer is not the "taxpayer" that initially incurred the tax liability, an officer is liable for payment of the tax under Mich. Comp. Laws Ann. § 211.27a(5), and so is a payer of tax (a taxpayer). The debt that the taxpayer in this case listed on his bankruptcy schedule is a debt for a tax, which the taxpayer became liable to pay by virtue of the officer liability statute. Paul A. Henderson v. Mich Department of Treasury

New York Court Holds Metropolitan Commuter Transportation Mobility Tax Unconstitutional : On August 22, the Supreme Court for Nassau County, New York, held that the metropolitan commuter transportation mobility tax (MCTMT) is unconstitutional because the New York State Legislature did not follow proper procedures in enacting the law. In its decision, the Court held that the MCTMT was unconstitutionally passed by the legislature. Because the MCTMT was a special law that did not serve a substantial state interest, the law should have been passed with either a home rule message or by a message of necessity with a two-thirds vote of each house. Accordingly, the Court granted the municipalities' motion for summary judgment. However, the New York State Department of Taxation and Finance has announced that the litigation has not concluded and taxpayers that have been paying the MCTMT should continue to pay and file returns. See Mangano v. Silver, New York Supreme Court, Nassau County, No. 14444/10, Aug. 22, 2012 for details of the decision.

Rhode Island Kicks off Amnesty Program : From September 2, 2012, to November 15, 2012, Rhode Island will offer an amnesty program for delinquent taxpayers. The amnesty program applies to the following taxes due on or before December 31, 2011: Corporate income tax, estate tax, fiduciary income tax, personal income tax, sales and use tax, cigarette and tobacco products taxes, and employer taxes. The amnesty includes 2011 Rhode Island personal income tax returns that were due April 17, 2012. In exchange for coming forward, taxpayers will pay the full amount of overdue taxes plus 75% of any interest due, without having to pay the remaining interest and any penalty amounts due and without being subject to any other civil or criminal penalties. Taxpayers who are eligible for tax amnesty may set up a payment plan; however, the full amount of the tax and 75% of any interest due must be paid no later than December 14, 2012. For details visit: http://www.taxamnesty.ri.gov/.

Texas Issues Sales Tax Guidance on Cloud Computing : A company's information technology infrastructure services offered to customers in the form of web services are subject to sales and use taxes. The services, commonly referred to as "cloud computing" services include the ability for customers to store, retrieve and maintain content, data, applications and software on the company's servers; run applications, monitor computers and computer usage, send electronic communications, and host web domains; and copy information to sites within the company's network and route end user requests for customer data to the site that can deliver the information most quickly. The fees charged for these services, along with incidental usage fees, are taxable data processing services pursuant to Tex. Tax Code Ann. § 151.0035. Advanced email software services provided by the company are taxable as telecommunications services while a service that provides customers with access to data gathered from the internet is taxable as an information service. Local taxes due on the sales of data processing and information services sold by the company are sourced to the local taxing jurisdictions in effect at the customer's Texas location. See Policy Letter Ruling 201207533L for details.




 

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The Times They Are a-Changin’: Sales Tax in a Technologically Advancing World

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Cloud computing. Software as a service. Digital goods. Webhosted. Web-based. Web-enabled. Licenses. Subscriptions. Nowadays, most companies use a variety of these tools in the everyday operations of their businesses. With such advancements, it has become especially important for businesses to understand the tax ramifications that result from the buying, selling and use of these goods and services. Read more

To read the full text of the State & Local Tax Advisor newsletter, go here.

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Multi-State Taxation for Interstate Carriers

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Due to shrinking budgets and deficit spending, state departments of revenue are actively searching for interstate carriers that should be filing income tax returns in their state. Some states, such as New Jersey, are impounding tractors during routine traffic stops if the officer cannot verify that the company is current on their income tax filings. Other states are reviewing fuel tax filings and cross referencing them to income tax rolls. Once a company has been flagged as a non-filer, many states will request returns be prepared for the last three to six years and the tax be paid with the potential for large interest and penalty assessments. Read more
 
To read the full text of the Truck Times newsletter, go here.

 

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Shortage of Qualified Workers is Indiana Manufacturing's Big Obstacle

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Preliminary results from the 2012 edition of the Indiana Manufacturing Survey reveal that Indiana's manufacturing sector continues to recover and provide numerous reasons for optimism. Yet, this is tempered by an all-too-familiar refrain: the lack of availability of trained workers is preventing a more robust recovery and holding the state back from what could be an even brighter future in manufacturing.

In a financial sense, Indiana manufacturers have shaken off much of the effects of the recent “Great Recession." A plurality of Hoosier manufacturers in the survey now regard their company's financial performance as “healthy" (43 percent), while 42 percent consider their performance "stable," and only 15 percent describe their situation as "challenged." These findings represent a marked improvement over last year, when 46 percent of respondents described their financial condition as "challenged," 30 percent viewed it as “stable," and just 23 percent considered their financials to be “healthy." 

The improved financial outlook is accompanied by a renewed focus on long-term goals and strategies. Notably, survey participants are boosting capital investment by an average rate of almost 18 percent, up four percent over last year's healthy 14-percent increase. This capital investment reflects more aggressive business strategies, with 66 percent of respondents pursuing increased investment in areas essential to revenue growth and 15 percent increasing investment across the entire company, while only 19 percent of respondents remain focused on cost cutting. These figures contrast markedly with last year, when cost cutting was the dominant strategy, and barely 5 percent of respondents were aggressively investing on a company-wide basis. 

As the improved financial performance and the renewed emphasis on capital investment suggest, the recovery of Indiana manufacturers is rooted in higher capacity utilization, which increased to 74 percent, up from 64 percent in 2011. At the same time, Hoosier manufacturers are reporting fewer customer complaints and late deliveries, along with improving customer satisfaction and product quality. 

The most popular approach to process improvement remains "lean" methods, with more than 70 percent of Hoosier factories featuring it as part of their overall production strategy, while automation continues to dominate everything from fabrication to inspection on the shop floors. In fact, 83 percent of respondents believe their production efficiency, in terms of material and energy consumption, was either the same or better than their industry peers.

There is also good news for Indiana in terms of retaining and attracting manufacturing. Only four percent of Hoosier manufacturers plan on relocating or "offshoring" any manufacturing outside the United States between now and 2013. Conversely, 13 percent anticipate relocating or "onshoring" manufacturing back to the United States by the end of 2013. Another 13 percent plan to open a new manufacturing facility in Indiana within the next two years, and each of these new factories is expected to employ between 30 and 80 workers. Indiana's strongest attraction in regards to manufacturing remains its central location, modest cost of living, and outstanding transportation network.

At least one major issue, however, still looms on the horizon. For the first time in the history of this survey, human resource development (i.e., workforce training) overshadowed capital investment, information technologies, and improving organizational structures and processes as the top concern of Indiana manufacturers. In fact, 85 percent of the survey respondents believe the biggest obstacle to sustained growth in Indiana manufacturing is the shortage of qualified workers. As one manufacturer lamented, "We can't seem to take enough time to train new employees." Some manufacturers report making extensive use of overtime as a near-term solution, while others view increasing automation as the only way to move forward given the shortage of qualified workers. Much is at risk in this regard; future editions of this study will no doubt reveal if Indiana's businesses, educators and government can keep working together to solve this critical workforce issue.

This annual survey is a joint collaboration between Katz, Sapper, & Miller, LLP, Conexus Indiana, the Indiana Manufacturers Association, and Indiana University's Kelley School of Business. The survey remains open until September 15, and any Indiana manufacturers and distributors interested in participating are welcome to do so by visiting the 2012 Indiana Manufacturing Survey site. An executive summary of the survey findings will be released later in 2012.

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Have You Considered an Automatic Enrollment Feature for Your 401(k) Plan?

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Do you want to offer a retirement plan that provides a high level of employee participation and makes it easy for you to withhold employee contributions and select the investments for those contributions? Do you currently have a plan that fails to meet its annual non-discrimination testing requirements? If so, then you may want to consider an automatic enrollment feature for your 401(k) plan.

Approximately 30 percent of eligible employees do not participate in their employer's 401(k) plan. Many employees are intimidated by their employer’s 401(k) plan and all the decisions (contributions, investments, etc.) needed to participate. Whether you already have a 401(k) plan or are considering one, an automatic enrollment feature offers the following advantages:

  • Increased plan participation  
  • Allows for the certain investments if employees do not select their investments
  • Simplifies the selection of investments appropriate for long-term savings for participants
  • Helps employees begin saving for their future
  • Offers significant tax advantages (including deduction of employer contributions and deferred taxation on contributions and earnings until distribution)
  • Permits distributions to employees who opt out of participation in the plan within the first 90 days

A basic automatic enrollment 401(k) plan must state that employees will be automatically enrolled in the plan, unless they elect otherwise, and must specify the percentage of an employee's wages that will be automatically deducted from each paycheck for contribution to the plan. The document must explain that employees have the right to elect not to have salary deferrals withheld or to elect a different percentage to be withheld.

An eligible automatic contribution arrangement (EACA) is similar to the basic automatic enrollment plan, but has specific notice requirements. An EACA can allow automatically enrolled participants to withdraw their contributions within 30 to 90 days of the first contribution.

A qualified automatic contribution arrangement (QACA) is a type of automatic enrollment 401(k) plan that automatically passes certain kinds of annual required testing. The plan must include certain required features, such as a fixed schedule of automatic employee contributions, employer contributions, a special vesting schedule, and specific notice requirements.

Disclosure Requirements

Employers must notify employees who are eligible to participate in the plan about certain benefits, rights and features. Employees must receive an initial notice prior to automatic enrollment in the plan and receive a similar notice annually. 

The notice should include information about the automatic contribution process, including the opportunity to elect out of the plan. In addition, the notice must describe the default investment used by the plan, the participants' right to change investments, and where to obtain information about other investments offered by the plan.

An annual notice must be provided to participants and all eligible employees at least 30 days, but not more than 90 days, prior to the beginning of each subsequent plan year.

If the participant, after receiving the initial or annual notice, does not provide investment direction, the participant is considered to have decided to remain in a default investment.

Participation

Employees are automatically enrolled in the plan and a specific percentage will be deducted from each participant's salary unless the participant opts out or chooses a different percentage.

Contributions

Basic and Eligible Automatic Enrollment 401(k) Plans – As with any 401(k) plan, in addition to employee contributions, you decide on your business' contribution (if any) to participants' accounts in your plan. If employers decide to make contributions to an automatic enrollment 401(k) plan for employees, there are additional options. Employers can match the amount their employees decide to contribute (within certain limits), or contribute a percentage of each employee's compensation (called a nonelective contribution) – or both. Employers have the flexibility of changing the amount of matching and nonelective contributions each year, according to business conditions.

Qualified Automatic Contribution Arrangements – If a plan is set up as a QACA with certain minimum levels of employee and employer contributions, it is exempt from the annual testing requirement that applies to a traditional 401(k) plan. The initial automatic employee contribution must be at least three percent of compensation. Contributions may have to automatically increase so that, by the fifth year, the automatic employee contribution is at least six percent of compensation.

The automatic employee contributions cannot exceed 10 percent of compensation in any year. The employee is permitted to change the amount of his or her employee contributions or choose not to contribute, but must do so by making an affirmative election.

The employer must at least 1) make a matching contribution of 100 percent for salary deferrals up to one percent of compensation and a 50 percent match for all salary deferrals above one percent, but no more than six percent of compensation; or 2) make a nonelective contribution of three percent of compensation to all participants.

Contribution Limits – Employees can make salary deferrals of up to $17,000 for 2012. This includes both pre-tax employee salary deferrals and after-tax designated Roth contributions (if permitted by the plan). An automatic enrollment 401(k) plan can allow catch-up contributions of $5,500 per year for 2012 for employees age 50 and over.

Vesting

Automatic employee contributions are immediately 100 percent vested.

Employer contributions are vested according to the plan's vesting schedule. However, the required employer contributions under a QACA must be fully vested by the time an employee has completed two years of service.

Nondiscrimination

Basic automatic enrollment 401(k) plans and most EACAs are subject to annual testing to ensure the amount of contributions made on behalf of rank-and-file employees is proportional to contributions made on behalf of owners and managers. Automatic enrollment typically increases participation, thereby making it more likely that a plan will pass the test. Automatic enrollment 401(k) plans set up as QACAs are not subject to this annual testing.

Investing the Contributions

You can automatically invest employee contributions in certain default investments that generally offer high rates of return over the long term and provide a greater opportunity for employees to save enough money to take them through retirement. If carried out properly, employers can limit liability as plan fiduciary for any automatic enrollment 401(k) plan losses that are a result of investing participants' contributions in these default investments. Note that employers are still responsible for prudently selecting and closely monitoring these default investments. There are conditions to obtain this relief from liability:

  • Plan sponsors place the participant's contributions in certain types of investments.
  • Before his or her first contribution is deposited, the participant receives a notice describing the automatic enrollment process; a similar notice is sent annually thereafter.
  • The participant does not provide investment direction.
  • The plan passes along to the participant material related to the investment.
  • The participant is given the opportunity periodically to direct his or her investments from the default investment to a broad range of other options.

Qualified Default Investment Alternatives – You can choose from four types of investment alternatives for employees' automatic contributions, called qualified default investment alternatives, or QDIAs. Three alternatives are diversified to minimize the risk of large losses and provide long-term growth. They are:

  • A product with an investment mix that changes asset allocation and risk based on the employee's age, projected retirement date, or life expectancy (for example, a lifecycle fund);
  • A product with an investment mix that takes into account a group of employees as a whole (for example, a balanced fund); and
  • An investment management service that spreads contributions among plan options to provide an asset mix that takes into account the individual's age, projected retirement date or life expectancy (for example, a professionally managed account).

There is an alternative that allows plans to invest in capital preservation products, such as money market or stable value funds, but only for the first 120 days after the participant's first automatic contribution. This option can be used only in EACAs that permit employees to withdraw their automatic contributions and earnings between 30 and 90 days (as specified in the plan) after the participant's first automatic contribution. Before the end of the 120-day period, if you receive no direction, you must redirect the participant's contributions in the capital preservation product to one of the long-term investments mentioned above.

Note that you do not have to select a QDIA for your plan. You may find that other default investment alternatives would be more appropriate for your employees.

Distributing the Contributions

Employees may not want to participate in the company retirement plan. If employers want to allow participants to withdraw their contributions within 30 to 90 days of the first contribution, your plan document must provide for this option and be set up as an EACA. Any distributed amounts, including earnings, are treated as taxable income in the year distributed. The distribution is reported on a Form 1099-R and are not subject to the 10 percent early withdrawal tax.

If an employee decides to withdraw investments within 30 to 90 days of the first contribution, a plan cannot impose restrictions, fees or expenses beyond standard fees for services, such as investment management and account maintenance. Further, participants should not be subject to penalties, such as surrender charges, liquidation fees, or market value adjustments.

For questions regarding your retirement plan, please contact any of the members of our Employee Benefit Plan Services Group.

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State & Local Tax Update - 8/21/12

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Reassessment for Indiana Real Property Taxes: Indiana counties are currently wrapping up their 2012 statewide reassessments. During a reassessment year, county and township assessors are required to inspect all properties and adjust all assessed values to properly reflect market value in use. Counties were last required to reassess property in 2002; therefore, some property owners should expect significant changes as a result of the 2012 reassessment.

Property owners are encouraged to review their assessment notices (Form-11) as soon as they receive them to make sure the assessed value looks appropriate. The property owner has 45 days to file an appeal after the mailing of the first notice of assessment. When a property owner receives their tax bill, it is often too late to appeal the assessed value for that year. Some counties began mailing their assessment notices this month.

Contact your KSM advisor, or KSM property tax leader Chad Miller, as soon as you receive your Form-11. We would be happy to review the reassessed value of your commercial property to help you consider whether an appeal should be filed.

 

Indiana Supreme Court Rules on Sales Factor Sourcing: The Indiana Supreme Court has held that a brewery and malt beverage distribution company's sales to Indiana customers, who used common carriers to pick up merchandise in the company's Ohio facility for delivery to Indiana, are in fact Indiana sales; accordingly, these sales are subject to the state's adjusted gross income tax. The Court further held the Tax Court's determination that an example included in Ind. Admin. Code § 3.1-1-53 operated to exempt the company from Indiana tax on income from sales of goods delivered by common carrier to Indiana customers was erroneous since the example was not a rule and did not have the force of law. See Indiana Department of Revenue v. Miller Brewing Company for details of the decision.

Alabama Issues Sales Tax Nexus Regulation: The Alabama Department of Revenue has adopted new rule 810-6-2-.90.01 , Seller's Responsibility to Collect and Pay State Sales Tax and Seller's Use Tax, effective July 31, 2012. The new rule makes clear that, under certain conditions, an out-of-state seller is engaged in-state in the business of selling tangible personal property at retail and is required to register with the Department for a sales tax license and collect /remit sales tax on all sales made within Alabama. The new rule tracks the language of Ala. Code § 40-23-190, which indicates that actions/activities of related parties can create substantial nexus for an out-of-state seller.

California Gillette Decision Vacated: On Aug. 9, 2012, the California Court of Appeal has, "on its own motion and for good cause," vacated its previous decision in the Gillette case and ordered a rehearing to decide whether California can require multistate taxpayers to use the double-weighted sales factor formula to apportion their net business income for corporation income tax purposes only if California repeals its Multistate Tax Compact provision, which allows taxpayers an option to use the equally weighted UDITPA apportionment formula.

Michigan Tax Tribunal Rules on Rolling Stock Exemption: The taxpayer was not entitled to a "rolling stock" exemption for parts that were affixed to its trucks or trailers after the date that the trucks or trailers were purchased. The taxpayer is an interstate motor carrier who purchased certain parts - auxiliary power units, bunk heaters, and GPS systems - that were not affixed to the trucks or trailers at the time the taxpayer purchased the trucks and trailers. The sales and use tax exemptions for rolling stock used in interstate commerce only exempt "parts" that are affixed to a truck or trailer. Under the sales tax exemption, a part that is affixed to a truck at the time of purchase is exempt; however, if a person purchases a part that is not affixed to a truck or trailer, it is taxable. Since the taxpayer affixed the parts after acquiring the trucks and trailers, the parts were not "affixed to" a truck or trailer at the time they were used or consumed in Michigan. Thus, the parts were taxable. See MLT, Inc. v. Michigan Department of Treasury for details of the decision.

Utah Income Tax Nexus Regulation Amended: Utah Admin. R. R865-6F-6 has been amended to reflect current policy, as a result of case law and amendments to the Multistate Tax Commission rule, to indicate that delivery of goods in a seller's vehicle no longer creates nexus for corporation income or franchise tax purposes.

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Property Tax Reassessment: Property Owners Beware

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2012 is a real estate tax reassessment year for Indiana real property taxes. This means that every parcel of property in the state will be examined by a county assessor to determine if the assessed value of the property should be increased. Considering the last Indiana property tax reassessment took place 10 years ago (in 2002), the Indiana assessment of property on thousands of parcels of commercial property across the state are expected to increase by the time reassessment is complete.

With this in mind, the first thing a property owner should do when they receive the Form 11 notice of assessment is to look at the assessed value and ask, "Could I sell my property for this price?" If the answer is "no," then it is possible that the property may be over-assessed. In this case, KSM's property tax calculator will estimate the amount of property taxes you may save by filing an appeal.

KSM's property tax leader Chad Miller has more than 12 years of experience in dealing with Indiana's difficult assessment system. Prior to joining KSM, Chad worked as the lead commercial assessor for one of the largest business corridors in the state. As a result, Chad has witnessed firsthand just about every argument an assessor or taxpayer can make for or against an Indiana property tax appeal. Since coming to KSM, Chad and his team have used this experience to lower the Indiana real property taxes for our clients, reducing their assessed value by more than $204,000,000. And that is just in the first six months in 2012.

If you are interested in a free review of your property's assessed value to determine if an appeal makes sense, please contact Chad at 317.580.2058 or cmmiller@ksmcpa.com.

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IRS Issues New Rules Under 263(a)

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On Jan. 1, 2012 new rules became effective regarding when to deduct or capitalize amounts paid to acquire, produce or improve tangible property. These new rules will affect all taxpayers that acquire, produce or improve tangible property.

The question of when to deduct or capitalize amounts paid to acquire, produce or improve tangible property is frequently a point of disagreement between taxpayers and the Internal Revenue Service (IRS). Since 2004 the IRS has been developing guidance intended to reduce controversy related to this question. After issuing and withdrawing proposed regulations under §1.263(a) in 2006 and 2008, the IRS in December 2011 issued yet another round of temporary and proposed regulations, with §1.263(a)-1T providing general rules for capital expenditures, §1.263(a)-2T providing rules for amounts paid for the acquisition or production of tangible property, and §1.263(a)-3T providing rules for amounts paid for the improvement of tangible property. Also affected are guidelines under Regulations §1.162-3 regarding materials and supplies and other regulations indirectly affected by changes to Regulations §1.263(a). These regulations are effective on Jan. 1, 2012 and will expire on Dec. 23, 2014 if not made final.

§1.162-4T of the temporary regulations states that a taxpayer may deduct amounts paid for repairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized. §1.263(a)-1T provides that no deduction is allowed for (1) any amount paid for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, or (2) any amount paid in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. The ongoing dilemma for taxpayers has been the application of these rules to business activity. What constitutes an “incidental” repair? What is “maintenance”? How does one discern when an asset has increased in value or had its useful life extended?

The temporary regulations generally divide asset types into (1) buildings and structural components thereof, and (2) assets other than buildings and structural components thereof (i.e., everything else). The temporary regulations further categorize expenditures into (1) amounts paid to produce or acquire tangible property and (2) amounts paid to improve tangible property. Underlying any analysis of whether to deduct or capitalize an expenditure is the concept of the “unit of property” (UOP). 

In the case of property other than buildings, the UOP for real and personal property includes all functionally interdependent components of the property. Components are functionally interdependent if placing one component in service depends upon placing the other component in service. For example, a tractor trailer in its entirety (inclusive of all components such as the motor, the cab, the transmission, the tires, etc.) is the unit of property. In the case of buildings, the UOP concept is clarified and expanded to separately consider important functional systems of a building. 

Under the new regulations, the building UOP consists of (1) the building and structural components; (2) heating, ventilation and air conditioning systems; (3) plumbing systems; (4) electrical systems; (5) all escalators; (6) all elevators; (7) fire protection and alarm systems; (8) security systems; (9) gas distribution system, and; (10) any other system defined in published guidance. This is a significant change compared to previously issued proposed regulations, given that under prior guidance taxpayers treated the entire building, inclusive of the now separately identified systems, as a single unit of property. For example, under prior guidance an expenditure related to heating, ventilation, and air conditioning (HVAC) systems may have been deducted based on the analysis that the UOP, the building, was not improved. Now, the analysis must look at only the HVAC system as the UOP, in which case the position for deducting or capitalizing the expenditure may change.

Temporary regulations under §1.263(a)-2T regarding the acquisition or production of property retain most generally understood rules regarding capitalization of expenditures. Expenditures directly or indirectly incurred that result in the production or acquisition of a UOP must be capitalized. Amounts paid to move and reinstall a UOP already placed in service by the taxpayer are generally not amounts paid to acquire or produce a unit of property. All work performed on a UOP prior to the date placed in service is required to be capitalized. In general, all expenditures that facilitate the acquisition or production of real or personal property, such as permitting or title searches, must be capitalized.

The temporary regulations continue to provide a de minimis rule regarding the amounts paid to acquire or produce tangible property (e.g., deducting amounts paid under $500). However, the general rule prohibiting a distortion of income is replaced with a bright-line ceiling rule. Taxpayers may not deduct otherwise capital expenditures in excess of the lesser of 0.1 percent of the taxpayer’s gross receipts for the tax year, or 2 percent of the taxpayer’s total depreciation and amortization for the tax year. Additionally, taxpayers are eligible to use a de minimis rule only if they have an “applicable financial statement” (i.e., an audited financial statement).

Acquired materials and supplies are discussed under the temporary regulations. Materials and supplies that are incidental (for which no inventories or records of consumption are maintained) are deductible in the year purchased. Materials and supplies that are non-incidental are not deductible until the year in which they are used or consumed. In general, materials and supplies include property acquired to maintain, repair, or improve a unit of tangible property owned, leased or serviced by the taxpayer and that are not acquired as part of any single unit of property. Examples might include air filters for use in a building’s HVAC system, or brake pads for use on a tractor trailer. The proposed regulations add descriptions of material and supplies to include fuel, lubricants, water and similar items reasonably expected to be consumed in 12 months or less, beginning when used in the taxpayer’s operations.

Proposed regulations under §1.263(a)-3T address amounts paid to improve tangible property. In general, amount paid related to a UOP already in service that (1) result in a betterment to the UOP; (2) restores the UOP; or (3) adapts the UOP to a new or different use must be capitalized. The application of these standards to amounts paid will likely remain a source of contention between taxpayers and the IRS, but the temporary regulations provide numerous examples of typical transactions and their treatment under the new rules. Of particular note are changes to regulations that specifically allow the disposition of structural components of a building or building systems. This will allow the adjusted basis of the retired component (e.g., an old roof) to be recovered when replaced. 

The temporary regulations will dispense of the plan of rehabilitation doctrine, which required that otherwise deductible repairs or maintenance be capitalized if performed in conjunction with a larger remodeling or construction project. Retailers and other taxpayers whose buildings or other physical premises are subject to periodic refreshing are given guidance, via examples, on when such costs may be deducted. Taxpayers will still lack bright-line tests that provide clear guidance in such circumstances, so the facts and circumstances of each project must be analyzed. Any expenditure incurred to improve a material condition or defect in property that existed prior to acquisition, or which arose during production, must be capitalized regardless of whether the taxpayer was aware of the problem.

The temporary regulations provide a routine maintenance safe harbor for tangible property other than buildings or building systems. Routine maintenance is a recurring activity and expenditure related to a UOP that a taxpayer expects to perform as a result of the taxpayer’s use of the property. The activity must keep (rather than put) the UOP in its ordinarily efficient operating condition. An activity is considered routine only if the taxpayer reasonable expects to perform the activities more than once during the class life of the UOP.

The temporary regulations under §1.263(a) are far reaching and the discussion above serves to touch on many, but not all, key points that taxpayers should understand when determining whether to capitalize or deduct an expenditure. Taxpayers determining whether to deduct or capitalize expenditures should refer to these temporary regulations, the examples provided, and their KSM advisor.

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Buy Here - Pay Here Industry Snapshot: Issues and Challenges Affecting Dealers

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This snapshot, brought to you by Katz, Sapper & Miller’s Buy Here – Pay Here (BHPH) Services Group, summarizes issues and challenges gleaned from recently held BHPH automobile dealer conferences and their current and future impact on the BHPH market.

Insurance/Warranty Sales – Many dealers are considering or already offering a variety of after-market products such as auto warranty/extended service contracts (separate or embedded); collateral asset protection for leasing; GAP insurance, etc. As car sale margins decline, additional revenue sources are becoming increasingly important. It is imperative that these operations are structured in a way that complies and takes advantage of the relevant provisions of the tax law. Offering such products while providing valuable protection can provide additional revenue with minimal cost. Whether you already offer such products or will begin anew, analyzing and considering changes to your insurance products offered with each sale is an opportunity to increase profit and lower taxes.

Capital Sources Loosening – In recent years the number of lenders who attended and exhibited at BHPH automobile dealer conferences had declined sharply. In 2012, the amount of lender exhibitors increased; discussion among BHPH owners shows that opportunities for capital are becoming more prevalent. All dealers who have had capital shortages in the past and are performing strongly should consider capital opportunities in the BHPH market. 

Inventory Shortages – Dealers are continuing to struggle to find appropriate automobiles for resale. According to industry experts, this problem will persist for several more years due to increased demand and recent decreases in the production of new vehicles. Dealers need to be creative and look to adopt new methods of acquiring inventory including utilizing such options as classified ads/for sale by owner, Craig's List, eBay, and other electronic sources.

Fraud – With the increased usage of electronic information and the availability of software applications that make it easy to reproduce and modify electronic information, dealers are seeing a rise in fraud. Dealers should examine their internal controls on a regular basis to make sure that they have adequate controls in place to detect and prevent fraud.

Consumer Financial Protection Bureau (CFPB) – There has been much discussion in the BHPH industry concerning the newly formed CFPB. The CFPB is still in the start-up and fact finding phase, but it has been ramping up quickly and hiring many staffers. There is great speculation as to the type of regulation that will come out of the CFPB, but little doubt of increased regulation on the BHPH industry. Dealers should continue to monitor the progress of the CFPB, so as to quickly adapt to any new regulation.

Community Involvement and Customer Relationships – With the rise in activity from the CFPB and increased competition, dealers are finding it beneficial to become more involved in and make contributions to their community. Additionally, they are finding the need to be more proactive in creating long lasting relationships with their customers. It is important that the community has a positive perception of the BHPH industry, recognizes the role that dealers play in their community, and understands it is a benefit to have these types of businesses in their neighborhoods. Taking the time and effort to create relationships with customers has shown to increase sales via returning customers, assist with collections, and help customers reestablish themselves in society.

Leasing – Leasing continues to be a hot topic in the BHPH industry. There are several advantages to a Lease Here - Pay Here model over a BHPH model, but the largest roadblock for dealers looking to convert continues to be their lending sources. Considering this is a relatively new topic in the BHPH industry, lenders are finding it difficult to get comfortable with the leasing model and are taking a hard look into understanding its benefits. Leasing appears to be gaining more acceptance in the lending community, however, which is a great sign for those dealers wanting to make the switch.

To further discuss any of the items above or learn more about how Katz, Sapper & Miller can help your dealership, please contact Jeff Taylor or Kevin Sullivan.




 

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Patient Protection and Affordable Care Act

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The U.S. Supreme Court recently announced its decision on the constitutionality of the Patient Protection and Affordable Care Act of 2010. The court ruled that a substantial portion of the act was constitutional, including the additional Medicare taxes to be imposed on certain individuals effective Jan. 1, 2013. The following is a summary of the new Medicare tax provisions as of Jan. 1, 2013.

Unearned Income Medicare Tax 

Effective Jan. 1, 2013, certain individuals, trusts and estates will be required to pay a 3.8 percent Medicare tax on their share of net investment income. Net investment income includes interest, dividends, royalties, annuities, rents, passive trade or business activities, and capital gains reduced by any expenses related to the investment income.

For individuals, the additional Medicare tax may be imposed against you if your modified adjusted gross income exceeds of the following income amounts:

  1. Married Filing Joint and Surviving Spouses — $250,000
  2. Married Filing Separate — $125,000
  3. Single and Head of Household — $200,000

The tax will apply to the lessor of the net investment income or total modified adjusted gross income in excess of the threshold amounts listed above.

Income from nonpassive trade or business activities will not be considered investment income for purposes of the Unearned Income Medicare Tax. For example, real estate professionals would have their real estate-related income exempt from the net investment income definition.

The unearned income of dependent children who are taxed at their parents’ income tax rate will not be subject to the tax unless such child’s income exceeds $200,000.

High Income Medicare Tax

Effective Jan. 1, 2013, individuals will be required to pay a 0.9 percent Medicare tax on wages and self-employment income in excess of the following amounts:

  1. Married Filing Joint and Surviving Spouses — $250,000
  2. Married Filing Separate — $125,000
  3. Single and Head of Household — $200,000

The tax will apply to the amount of wages and self-employment income in excess of the threshold amounts listed above. Furthermore, the additional 0.9 percent Medicare tax on a joint return is determined by the combined wages and self-employment income of both taxpayers. Employers will be responsible for withholding the additional 0.9 percent only for those employees who earn wages in excess of $200,000 from such employer.

If you are filing a married filing joint tax return with combined wages and self-employment income in excess of $250,000, you may not be able to rely only on your withholdings to cover the additional 0.9 Medicare tax, and you may need to account for all or a part of the additional tax in determining your responsibility to make quarterly estimated tax payments.

Income from partnerships, in which the partner’s share of income is subject to self-employment tax, is included in the calculation of the taxpayer’s earned income subject to the High Income Medicare tax. However, flow-through earnings from S corporations are not subject to the High Income Medicare tax.

Planning Opportunities

  1. Unearned Income Medicare Tax
    • Consider recognizing investment income, specifically capital gains, in 2012 instead of waiting until 2013. Recognition of capital gains in 2012 may allow you to avoid the 3.8 percent additional tax and have its gain taxed at the lower capital gain rate, which is currently set to increase to 20 percent as of Jan. 1, 2013.
    • Determine if you are passive or active in your investment activities. All passive activities should be reviewed to determine if you can be classified as active. A review of the passive activity rules is vital to determine if you are considered a passive or active investor in the trade or business, specifically the real estate industry.
    • Consider grouping similar activities as one activity and determine if you are considered active in the activity.
    • Consider potential change in investment strategy. Consider investments that result in tax exempt income, tax deferred income or non-dividend paying growth stocks.
    • In 2013 and beyond, consider the utilization of installment sales as a way to defer the recognition of income from property sales. For 2012 installment sale transactions that result in capital gains, consider electing out of the installment sale method and recognize 100 percent of the capital gain as it would be taxed at the lower 15 percent rate and avoid the 3.8 percent additional tax.
       
  2. High Income Medicare Tax
    • Consider recognizing additional wages in 2012 and reducing 2013 wages.
    • If you are a self-employed individual, consider deferring purchases until 2013 in order to reduce the net earnings subject to the additional tax.
    • If you are an S corporation shareholder, consider a reasonable reduction in salary and a reasonable increase in cash distributions.
    • Consider the check the box rules and convert a limited liability company from a partnership to an “S” corporation.

Be advised that these are the current rules and could be subject to change by Congress before the end of the year. In addition, if there is a change in the presidency and/or Congress this November, these rules could be significantly altered or completely repealed by the new president and/or Congress. If there are any questions or specific circumstances for discussion, do not hesitate to contact your KSM advisor.

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IVSC Issues New Guidelines on Fairness Opinions

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“A valuation or valuation analysis is often at the core” of a fairness opinion, says the International Valuation Standards Council (IVSC) in a news release. Although some countries regulate the conditions surrounding fairness opinion — including who may provide them and what they should contain — these requirements “are not consistent,” the IVSC says, “and many companies are domiciled in countries with no regulation at all.” Read more.

To read the full text of our Valuation Services Group newsletter, go here.

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Multiemployer Pension Plan Disclosure Update for Contractors

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In accordance with the FASB's Accounting Standards Update (ASU) 2011-09, Compensation-Retirement Benefits-Multiemployer Plans, enhanced disclosures will soon be required for employers who participate in multiemployer plans.

The new disclosure requirements include identifying significant multiemployer plans, the contributions made to those plans, the funded status of such plans and the existence of funding improvement plans implemented or pending implementation.

The ASU is effective for private companies for fiscal years ending after December 15, 2012, and is to be applied retrospectively for all periods presented. The disclosures should be based on information most recently available. Therefore, it is essential that employers begin to gather information for the enhanced disclosures now.

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State & Local Tax Update - 7/31/12

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Reassessment for Indiana Real Property Taxes: Indiana counties are currently wrapping up their 2012 statewide reassessments. During a reassessment year, county and township assessors are required to inspect all properties and adjust all assessed values to properly reflect market value in use. Counties were last required to reassess property in 2002; therefore, some property owners should expect significant changes as a result of the 2012 reassessment.

Property owners are encouraged to review their assessment notices (Form-11) as soon as they receive them to make sure the assessed value looks appropriate. The property owner has 45 days to file an appeal after the mailing of the first notice of assessment. When a property owner receives their tax bill, it is often too late to appeal the assessed value for that year. Some counties began mailing their assessment notices this month.

Contact your KSM advisor, or KSM property tax leader Chad Miller, as soon as you receive your Form-11. We would be happy to review the reassessed value of your commercial property to help you consider whether an appeal should be filed.

 

California Multistate Taxpayers May Elect 3-Factor Apportionment: The California Court of Appeals has ruled that multistate taxpayers could validly elect to use the Multistate Tax Compact's equally weighted 3-factor formula to apportion and allocate income for state corporation franchise/income tax purposes. The Compact's optional 3-factor formula, enacted by California in 1974, was not repealed and superseded by the 1993 amendment to California Revenue and Tax Code § 25128 that required use of the double-weighted sales factor apportionment formula because such an interpretation would be unconstitutional, violative of the prohibition against impairing contracts. The Court concluded that the Compact was a valid multistate compact, and California was bound by it and its 3-factor apportionment election provision unless and until California withdrew from the Compact by enacting a statute that repeals California Revenue and Tax Code § 38006. (Note that California has enacted legislation repealing the MTC code effective 6/27/12.) See The Gillette Co., et al. v. Franchise Tax Board for details of the case.

Illinois Court Rules on Residency: An Illinois appellate court ruled that a husband and wife were not required to pay Illinois income taxes for tax years 1996 through 2004 because they were residents of Florida. In 1995, the taxpayers left their Illinois home, renounced their Illinois residency, and moved to Florida. Because the couple then split their time roughly equally between the two states, they essentially maintained an intent to return to both Illinois and Florida for half of each year. Therefore, the "intent to return" element of domicile determination could not govern the result in this case. The court instead focused on the concept of domicile as an intended permanent home. Although they maintained contacts, memberships and real estate in Illinois, the taxpayers changed their voter registrations to Florida, paid Florida income taxes, obtained residency cards and drivers' licenses in Florida, and filed a declaration of Florida residency. Based on these factors, the court determined that the couple intended to live in Florida for half the year and visit Illinois, not the other way around. The court also examined whether the regularity and duration of the couples' visits to Illinois affected their residency status. Despite some continued Illinois ties such as social club memberships and the ownership of their longtime home, the couple spent more money on Florida social clubs; voted in Florida. used a Florida telephone number; distanced themselves from their Illinois-connected companies; and began to shift the focus of their charitable foundation to Florida causes; spent more money in Florida; and purchased burial plots in Florida. Overall, the couple had a much stronger connection to Florida. See Cain v. Hamer for details.

Missouri Resale Exemption Applies to Water used in Hotel Rooms: The Missouri Department of Revenue ruled that a Missouri hotel may purchase for resale water used by its patrons in their rooms for personal consumption and personal hygiene purposes and the water utility company may accept the hotel's resale exemption certificate in good faith. The hotel provides water in its hotel rooms and incorporates the cost of the water into the price the hotel patrons pay for renting the rooms. Each guest has access to the water spigots in his or her room to control the flow or completely shut off of the water in the room. Therefore, the hotel may purchase the water used in the rooms rented by its patrons under a resale exemption certificate and will not be required to pay sales tax on its purchase of water from the utility company. See LR 7118 for details.

Oregon Court Rules Officer Responsible for Withholding: The Oregon Tax Court ruled a taxpayer was personally liable for unpaid withholding taxes for businesses for which he served as an officer. The taxpayer, the principal officer of a group of restaurants, appealed the Department of Revenue's determination that he was personally liable for employment taxes that were not withheld by the restaurants for portions of 2008 and 2009. The taxpayer asserted, that for the periods at issue, because he had turned over the day-to-day operations of the restaurants to various consultants and was not aware that employment taxes were not being paid, he did not willingly fail to withhold and pay employment taxes. The court stated that, unlike the federal tax system, the Oregon tax system does not have a willfulness requirement in order to establish officer liability. The court also cited authority holding that the withholding tax responsibilities of corporate officers are not delegable and do not require the officer to be in control of the corporation. As the plaintiff continued to be the corporate officer for the relevant periods, he was responsible for the withholding of employment taxes and liable for any unpaid taxes. See Gantes v. Dept. of Revenue for details.

Pennsylvania Adopts Single Sales Factor: Pennsylvania has enacted legislation that requires the use of a sales factor apportionment formula to compute Pennsylvania corporate net income tax for tax years starting after Dec. 31, 2012. See H761 for details.

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Disclosure of Uncertain Tax Positions: Are Nonprofits in Compliance?

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As a not-for-profit, tax-exempt organization, one might think that the subject of “uncertain tax positions” does not apply to his or her organization. Think again — some of the basics of operations, including the organization’s tax-exempt status, could create uncertain tax positions that trigger critical reporting obligations. Read more.

To read the full text of Profitable Solutions for Nonprofits newsletter, go here.

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State & Local Tax Update - 7/16/12

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Reassessment for Indiana Real Property Taxes: Indiana counties are currently wrapping up their 2012 statewide reassessments. During a reassessment year, county and township assessors are required to inspect all properties and adjust all assessed values to properly reflect market value in use. Counties were last required to reassess property in 2002; therefore, some property owners should expect significant changes as a result of the 2012 reassessment.

Property owners are encouraged to review their assessment notices (Form-11) as soon as they receive them to make sure the assessed value looks appropriate. The property owner has 45 days to file an appeal after the mailing of the first notice of assessment. When a property owner receives their tax bill, it is often too late to appeal the assessed value for that year. Some counties began mailing their assessment notices this month.

Contact your KSM advisor, or KSM property tax leader Chad Miller, as soon as you receive your Form-11. We would be happy to review the reassessed value of your commercial property to help you consider whether an appeal should be filed.

 

Indiana Supreme Court Reverses Tax Court Decision: The Indiana Supreme Court has held that a package delivery company's foreign reinsurance company affiliates were not entitled to an exemption from payment of Indiana adjusted gross income tax for premiums collected because the affiliates were not doing business in Indiana and so were not subject to the Indiana gross premium privilege tax. Doing business in the state is a necessary condition that insurance companies not organized under the laws of Indiana must meet in order to be subject to the premiums tax and entitled to an exemption from the adjusted gross income tax. None of the evidence provided in the case showed that the foreign reinsurance company affiliates were doing business in Indiana, thus the taxpayer failed to establish it was entitled to summary judgment as a matter of law. The Tax Court Decision was reversed and remanded. See Indiana Department of Revenue v United Parcel Service, Inc. for details of the decision. 

Indiana Sales Tax Decision on Advertising Fees: Fees paid by a personalized gift company for the sending of emails to clients and prospects were not subject to Indiana sales tax because the Department of Revenue found that there was no transfer of tangible personal property nor specified digital product subject to Indiana sales tax. The company purchased a licensed software package used for emailing clients and prospects, as well as, mass email services which included the sending out general company announcements, promotions, schedules, new product releases and other communication. Invoices included both a software license fee and a per email charge; the per email charge was not considered to be part of the cost paid for licensing software, instead it was considered a service, which is not subject to sales tax. However, fees paid for the licensed software portion of the invoices were subject to sales tax. See LOF 04-20110492 for details.

Indiana Rules on Industrial Processing Exemption: Stone crushing equipment used by a company that processes and sells limestone products qualified for the industrial production exemption. Ind. Code § 6-2.5-5-3 provides for an exemption from sales tax for tangible personal property acquired for direct use in the direct production or processing of other tangible personal property. The equipment was used to crush limestone slabs in order to produce agricultural lime, crushed stone, gravel, rip rap and top soil; the Department determined that this process qualified for the industrial production exemption. However, the company's purchases of loaders, conveyor belts and other related equipment used in post-production activities were subject to sales and use tax. See LOF 04-20110122 for details.

Indiana Updates Agricultural Publication: The Indiana Department of Revenue has revised its information bulletin regarding agricultural production exemptions to clarify the taxability of agricultural machinery, tools, equipment, and buildings used directly in direct production. The revised bulletin also provides a website link for taxpayers to download a Streamlined Sales and Use Tax Agreement exemption certificate which can be used to purchase exempt agricultural-use property. See Information Bulletin 9 for the updated information. 

Michigan Changes Due Date for Nonresident Withholding: Recently passed legislation provides that every flow-through entity that must withhold income taxes for nonresident members must remit the taxes by April 15, July 15 and Oct. 15 of the flow-through entity's tax year and by Jan. 15 of the following year (previously, the dates were April 15, June 15, Sept. 15 and Jan. 15). See the Michigan Web page for details on the new withholding rules. 

Ohio Supreme Court Denies Government Exemption to Agent: The Supreme Court of Ohio upheld the decision of the Board of Tax Appeals and found that purchases made by the taxpayer, a company acting in its capacity as an independent contractor under a management agreement with the city of Cincinnati, did not qualify as an agent of the city with respect to the sales at issue. Cincinnati owns seven golf courses and contracted with the taxpayer to provide management services and the taxpayer did not pay sales tax with respect to otherwise taxable purchases while claiming to act as the city's agent. Sales to political subdivisions are generally exempt from sales and use tax by Ohio law, and the exemption may apply to a transaction in which an entity acts as a purchase agent for the municipality. A sale is a sale to a political subdivision only if the political subdivision is in actuality the purchaser that is consummating the sale by means of its agent; the city must assume and bear primary and essential liability to the vendor rather than its agent. However, the court agreed with the BTA in finding that political subdivision exemption does not apply to the instant case because the city was not a party to the purchase transactions and an agency relationship was not created. The taxpayer had the burden to show that the taxpayer was empowered to bind the city as a purchaser. Here, the taxpayer did not possess actual authority to bind the city to the purchases and the taxpayer's contract with the city specifically disclaims an agency relationship with respect to activities that the taxpayer conducts pursuant to the contract's terms. The contract's express provisions do not impose an agency relationship or support the notion that the taxpayer could bind the city when it made the purchases. Thus, the taxpayer is the consumer in the transactions at issue and the sales are sales to the taxpayer, not the city. See Cincinnati Golf Mgt., Inc. v. Testa for details of the decision.   

Tennessee Rules Deemed Dividend Subject to Income Tax: The distribution of a deemed dividend by an S corporation making an election under the federal Treasury Regulations to eliminate its accumulated earnings and profits constituted a taxable dividend for purposes of the Tennessee individual income tax. Tennessee imposes an individual income tax at the rate of six percent on "incomes derived by way of dividends from stocks or by way of interest on bonds of each person, partnership, association, trust and corporation in the state of Tennessee who received, or to whom accrued, or to whom was credited during any year" the dividend or interest income. The deemed dividend was properly characterized under Tennessee law as a dividend from stock and was received by, or accrued or credited to, the taxpayer's Tennessee shareholders during the tax year at issue. The Tennessee Code does not require that cash, stock, or other property actually be transferred to shareholders for taxable income to arise. On the contrary, the law expressly imposes the individual income tax on persons "who received, or to whom accrued, or to whom was credited" taxable dividend or interest income during the tax year. Moreover, there is no general requirement that money or other property be transferred directly to a shareholder for a dividend or other type of distribution to occur. It is sufficient that a direct or indirect transfer of money or other property be made for the benefit of the shareholders. See Letter Ruling 12-04 for details.

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State & Local Tax Update - 6/26/12

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Reassessment for Indiana Real Property Taxes: Indiana counties are currently wrapping up their 2012 statewide reassessments. During a reassessment year, county and township assessors are required to inspect all properties and adjust all assessed values to properly reflect market value in use. Counties were last required to reassess property in 2002; therefore, some property owners should expect significant changes as a result of the 2012 reassessment.

Property owners are encouraged to review their assessment notices (Form-11) as soon as they receive them to make sure the assessed value looks appropriate. The property owner has 45 days to file an appeal after the mailing of the first notice of assessment. When a property owner receives their tax bill, it is often too late to appeal the assessed value for that year. Some counties began mailing their assessment notices this month.

Contact your KSM advisor, or KSM property tax leader Chad Miller, as soon as you receive your Form-11.  We would be happy to review the reassessed value of your commercial property to help you consider whether an appeal should be filed.

Indiana Reminds Taxpayers of Electronic Filing Requirements: All businesses in Indiana must file and pay their sales and withholding taxes electronically effective Jan. 1, 2013. The Indiana Department of Revenue (IDOR) is encouraging taxpayers to electronically file and pay these taxes using INtax, which is the IDOR's online filing tool. Practitioners may also use INtax to: file and pay their clients' business taxes; manage returns, correspond with the IDOR about returns, and file returns when no tax is due; and view filing and payment history for each client. The IDOR will begin notifying all businesses that are not currently electronically paying and filing their sales and withholding taxes in July. See June Tax Dispatch for details.

Indiana Rules on Taxability of Custom Software: In a recent administrative hearing, the IDOR ruled that pre-written computer software that is modified for a customer and separately invoiced is exempt from tax. Under Indiana Code § 6-2.5-1-27, tangible personal property is defined to include prewritten computer software. Indiana Code § 6-2.5-1-24 defines "prewritten computer software" as computer software that is not designed and developed by the author or creator to the specifications of a specific purchaser. Indiana Code § 6-2.5-1-24(3) provides further that "if a person modifies or enhances computer software of which the person is not the author or creator, the person is considered to be the author or creator of the person's modifications or enhancements." In this instance, the taxpayer provided invoices reflecting separately stated charges for the modification or enhancement (customization) of the prewritten computer software. With this evidence, the IDR found that the taxpayer established that its purchase was not subject to use tax. The taxpayer was also able to show that only a portion of the software was used in Indiana and subject to use tax. See LOF 04-20110478 for details.

Michigan Releases 2012 Corporate Return: The Michigan Department of Transportation has issued the 2012 corporate income tax quarterly return (Form 4913). Form 4913 is used to report activity occurring after 2011. Form 4913 replaces the 2011 Michigan Business Tax (MBT) Quarterly Return (Form 4548). As a reminder, the corporate income tax took effect Jan. 1, 2012, replacing the Michigan Business Tax for corporate taxpayers. You can access the forms on the MI DOT website.

North Carolina Creates New Deduction for Business Income: The North Carolina Department of Revenue has issued a directive regarding the new deduction available for tax years beginning on or after Jan. 1, 2012, for personal income taxpayers who include net business income in federal adjusted gross income. The law allows a deduction of up to $50,000 of net business income included in adjusted gross income that is not considered passive under the Internal Revenue Code. The directive provides that net business income that is not considered passive is the aggregate of all business incomes and losses (excluding passive incomes and passive losses) reported on federal Schedules C, E, and F. For purposes of this deduction, passive income means the income generated from the conduct of an activity of a trade or business that satisfies the definition in Code Sec. 469. See Directive 12-2 for details.

Rhode Island Implements Minimum Fees for LLCs and Partnerships: Rhode Island Department of Taxation has adopted two new regulations affecting LLCs and partnerships. Reg. CT 12-14 and Reg. 12-16 outline new rules related to annual filing requirements and minimum fees owed by LLCs, including single member LLCs and partnerships.

Texas Revises Policy on Deduction Elections: The Texas Comptroller has reconsidered its position with regard to the election to take the cost of goods sold (COGS) or compensation deduction when filing an amended long form franchise tax report and will now allow taxpayers to amend reports to change their election, or to make an election, to use the COGS or the compensation deduction. See Comptroller's announcement for details of the new policy.

Utah Issues Guidance on Taxability of Software and Computer Services: The Utah State Tax Commission has issued guidance that becomes effective July 1 of this year for computer service providers on the taxability of common transactions, including the sales of prewritten software, custom software, remotely accessed software (including hosted software, application service provider software, software-as-a-service, and cloud computing applications), and computer services. License fees for remotely accessed prewritten software are taxable if the purchased software is used in Utah. If the remotely accessed software is used in more than one location and at the time of the transaction, the buyer provides the seller with a reasonable and consistent means for allocating the transactions between the locations, the seller must source the transactions to those locations. If the buyer does not provide the seller with a means of allocating the transaction among its locations, the seller must source the transaction to the buyer's address. See Publication 64 for details.

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State & Local Tax Update - 6/18/12

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Arizona Court Rules City Taxes Apply to Software License : A corporation that transferred possession of, but not title to, computer software was engaged in "sales" transactions rather than "licensing for use" for purposes of the city of Phoenix sales tax, even though a city legislative regulation classified the transaction as "licensing for use" since both title and possession were not transferred. The city ordinance merely required that either title or possession be transferred for a transaction to qualify as "sales." Since the legislative rule was in conflict with the city ordinance, it was, therefore, not controlling. Further, big box retailers' transactions involving software transfers of possession were classified as sales so that the taxpayer's transactions must be equally be treated as sales by the city. (City of Phoenix v. Actuate Corp., Ariz. Superior Court (Maricopa County), Dkt. No. TX 2010-000518, 02/22/2012. )

Illinois Updates Reciprocal Rate Chart on Vehicle Sales: The Illinois Department of Revenue has updated its "Reciprocal/Non-Reciprocal Vehicle Tax Rate Chart." Nonresidents may not claim the "out-of-state" buyer exemption on purchases of motor vehicles or trailers that will be titled in a state that does not give Illinois residents an "out-of-state" buyer exemption on their purchases in that state of motor vehicles or trailers that will be titled in Illinois. ST-58 lists each state and shows whether or not tax must be collected, and if so, the rate used to compute the tax. The chart is effective July 2012.

Massachusetts Rules Electronic Newsletters Subject to Sales Tax : The Massachusetts Department of Revenue ruled that sales of a company's electronic newsletter offering to MA customers are subject to MA sales and use tax because the object of the transaction is the sale of a license to use the company's proprietary software. The transfer of a license or right to use software on a server hosted by the taxpayer or a third party is taxable as a sale of software under MA sales and use tax laws. In this case, the company provides newsletter publishing services to its customers. While the company's offering involves the performance of some nontaxable services, such as bulk emailing, tracking newsletters, and compiling reports for customers in some cases, it combines these services with a license or right to access and use of company's software on a remote server with the customer performing most of these tasks themselves. The object of the customers' purchase of the offering is to obtain a license or right to use software on the company's server for the purpose of creating a business newsletter that will be distributed to the customer's subscribers, and the provision of any personal or professional services, which varies depending on the customer, is incidental. See Letter Ruling 12-6 for details.

New York Rules Newsletter Taxable As Information Service : An Administrative Law Judge has held that the taxpayer, a publisher of electronic newsletters geared to the needs of engineering, scientific, technical and industrial professionals, did not provide a nontaxable information service that was personal and individual in nature. The Administrative Law Judge found that the primary purpose and true aim of the taxpayer's newsletter service was to furnish information to a group of readers and that this function was not merely incidental to some other service, thus he determined that the taxpayer's service was a taxable information service under New York Tax Law § 1105(c)(1). The Administrative Law Judge concluded that the taxpayer's newsletter did not escape taxation under New York Tax Law § 1105(c)(1) as "the furnishing of information which is personal or individual in nature," because the fact that the group or segment to which the information was furnished was smaller than the general public or the entire field of engineers or scientists did not convert the taxpayer's service into a personal or individual information service. The Administrative Law Judge further noted that the taxpayer's service was not akin to a consulting service, as its subscribers did not request a particular piece of information nor is its information presented in response to a particular problem discrete to the newsletter reader. Because the taxpayer's information service was not personal or individual in nature, the Administrative Law Judge ruled that it was not removed from the realm of a taxable information service. (In the Matter of the Petition of GlobalSpec, Inc., NYS Division of Tax Appeals, ALJ, 823435, 05/10/2012.)

Texas Issues Decision On Freight Forwarder Sales : An out-of-state company with a warehouse in Texas that provided transportation logistics services for customers in Texas was not a transportation company but a freight forwarder, and receipts from its freight forwarding activities were services performed in Texas and should be apportioned to Texas. Under Texas statutes, the gross receipts of a taxable entity from its business done in Texas include the taxable entity's receipts from each service performed in Texas. A special apportionment formula for transportation companies is provided under Texas rules. Although no definition of a transportation company is provided in the franchise tax rules or the statutes, the Comptroller has issued rulings distinguishing between entities that directly transport goods or passengers and those that provide transportation logistics services. The taxpayer did not directly transport goods, but rather arranged for the shipment of goods by unrelated third parties. See Hearing Number 105,484 for details.

West Virginia Court Rules No Nexus Related to Trademarks : The West Virginia Supreme Court of Appeals has affirmed a trial court decision that a foreign licensor with neither physical presence nor substantial economic presence in-state had no nexus with West Virginia, so that the state's imposition of its corporation net income tax and franchise tax on the licensor's royalties earned from the nationwide licensing of food industry trademarks and trade-names would be invalid because the tax assessments satisfied neither the "purposeful direction" test under the Due Process Clause nor the "significant economic presence" test under the Commerce Clause. For additional information, see ConAgra.

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State & Local Tax Update - 5/25/12

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Indiana Issues Guidance on Taxation of Government Obligations: The Indiana Department of Revenue has revised its information bulletin regarding government obligations to provide an updated listing of exempt and taxable federal obligations. The revised bulletin also addresses the taxation of state and local bond interest issued by a state or political subdivision other than Indiana. Interest earned from a direct obligation of a state or political subdivision other than Indiana is subject to the adjusted gross income tax if the obligation is acquired after Dec. 31, 2011; an obligation will be considered to be acquired if the trade date is after Dec. 31, 2011. Interest earned from obligations held or acquired prior to Dec. 31, 2011, is not subject to Indiana income tax. Interest earned from obligations of Puerto Rico, Guam, Virgin Islands, American Samoa, or Northern Mariana is not included in federal gross income and is exempt under federal law, thus there is no add-back for interest earned on these obligations. See Information Bulletin 19 for details.

Arizona Repeals Use Tax Declaration for Consumers: Effective for taxable years beginning from and after Dec. 31, 2011, a person who stores, uses or consumes tangible personal property subject to tax for a nonbusiness purpose and the tax was not collected by a registered retailer, the person is no longer required to declare the annual amount of tax due on his or her individual income tax form. See SB 1214 for more information.

Illinois Circuit Court Declares Click-Through Nexus Rule Unconstitutional: A Cook County circuit court judge ruled that Illinois' 2011 "Amazon tax" legislation is unconstitutional, citing violations of the Commerce Clause and Supremacy Clause. Click here to view the decision.

Ohio to Offer Amnesty Program: From May 1, 2012, through June 15, 2012, Ohio will offer a general tax amnesty program to qualifying taxpayers with certain unreported or underreported taxes that were due and payable as of May 1, 2011. In exchange for coming forward, penalties will be abated and 50 percent of interest will be forgiven. Most taxes administered by the Department of Taxation are eligible; however, consumer's use tax is not eligible for the general amnesty program. A separate Consumer's Use Tax Amnesty Program is available. See http://ohiotaxamnesty.gov/ for details on eligibility and the application process.

Oklahoma Court Rules No Nexus for IP Company: The Oklahoma Supreme Court has reversed a determination of the Court of Appeals and ruled that the Tax Commission improperly assessed corporate income taxes against a Vermont corporation on payments it received from a restaurant chain for use of the taxpayer's intellectual property in Oklahoma where the licensing contract was not entered into in Oklahoma and where no part of the contract was to be performed in Oklahoma. See Scioto Insurance Company v. Oklahoma Tax Commission for details of the case and the Court's analysis.

Wisconsin Updates Sales Tax Publication on Digital Goods: The Wisconsin Department of Revenue has updated its publication concerning the application of sales and use taxes to digital goods. The revised publication reflects the Department of Revenue's determination that certain construction plans and construction project information are subject to sales and use taxes as additional digital goods that are news or other information products. This tax treatment applies for sales occurring on and after July 1, 2012. In addition, examples of products that constitute "additional digital goods" have been added to the publication, as well as examples of products that are transferred electronically but are not subject to the sales and use taxes imposed on sales of specified digital goods and additional digital goods. Finally, information on "bundled transactions" has been added to the publication. See Publication 240 for details.

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Safety Net Essentials

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Too few nonprofits keep healthy operating reserves. A study of charities in the Washington, D.C. area, for example, found that 57 percent of the organizations had insufficient operating reserves to cover three months of expenses - the minimum level many experts consider necessary to maintain financial stability. Read more.

Read the full text of the newsletter.

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State & Local Tax Update - 4/27/12

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Arizona Adjusts Qualifications for Charitable Contribution Credit: Effective for tax years beginning Dec. 31, 2011, contributions can only qualify for a tax credit if the organization to whom the contribution is made provides a written certification stating that it does not provide, pay for, or provide coverage of abortions and does not financially support any other entity that provides, pays for, or provides coverage for abortions. Language specifying that the organization will not promote or provide referrals for abortions is removed. See HB 2627 for details.

Maine Bill Eliminates Information Return Filing Requirement: Maine Governor Paul LePage recently signed a supplemental budget bill including a provision that eliminates certain information return filing requirements. For tax years beginning on or after January 1, 2012, the legislation repeals the information return filing requirement for partnerships and S corporations that have a resident partner or shareholder or income derived from sources in Maine. Related provisions are also repealed and certain other technical changes are made. See LD 1903 for details.

New Mexico Sales Tax Nexus Created for Online Bookseller: The New Mexico Court of Appeals has determined that the in-state use of the Barnes & Noble trademark was sufficient to meet the constitutional substantial nexus standard for Barnesandnoble.com LLC. Although the online bookseller (a separate legal entity) had no owned or leased property in NM, had no retail stores in NM, and no sales agents or employees in NM, the Court determined that nexus had been created through a relationship with the brick-and-mortar Barnes & Noble stores via utilization of common intangible property. (In the Matter of the Protest of Barnes and Noble Co, LLC v. New Mexico Taxation and Revenue Department, N.M. Ct. App., Dkt. No. 31,231, 04/18/2012.)

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State & Local Tax Update - 4/20/12

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Kentucky to Offer Amnesty Program: Kentucky Governor Steve Beshear has signed legislation authorizing a tax amnesty program to be conducted during the fiscal year ending June 30, 2013. The tax amnesty program will apply to tax liabilities for taxable periods ending or transactions occurring after Dec. 1, 2001, and prior to Oct. 1, 2011. The program will be available to all taxpayers owing taxes, penalties, fees or interest subject to the administrative jurisdiction of the Department of Revenue, with the exception of property taxes or penalties related to cigarettes or fuel licenses. Stay tuned for more information.

Kentucky to Streamline Local Tax Information: Recently passed HB 277 seeks to streamline and facilitate the efficient collection of local net profits, gross receipts, and occupational license taxes by requiring all local tax districts that levy such taxes to submit their tax forms, instructions and ordinances in either electronic or hard copy to the Kentucky Secretary of State for inclusion on the one-stop business portal or similar website before Nov. 1, 2012, and to accept tax returns using a new standard form that is to be developed by the Secretary.

Michigan Issues Guidance on Flow-Through Withholding Rules: The Michigan Department of Treasury has issued a release on the new withholding rules effective Jan. 1, 2012. The release addresses rules for the three categories of flow-through withholding (nonresident individuals, corporate members and flow-through members), returns and due dates.

Nebraska to Move to Market Approach for Income Tax: Beginning Jan. 1, 2014, Nebraska has modified its sourcing method for sales other than sales of tangible personal property. Sales of services, intangibles, lender fees and communications are affected be the new law. See LB872 for details of the changes.

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State & Local Tax Update - 4/13/12

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Colorado: Federal judge grants permanent injunction blocking Colorado notice and reporting requirements for out-of-state retailers: Effective March 30, 2012, Federal District Court Judge Robert E. Blackburn issued a permanent injunction requested by the Direct Marketing Association that blocks the Colorado Department of Revenue's imposition of notice and reporting requirements on out-of-state retailers because the provisions are unconstitutional under the U.S. Commerce Clause. Colo. Rev. Stat. § 39-21-112(3.5) and Colo. Code Regs. § 39-21-112.3.5 impose an improper and burdensome regulation of interstate commerce. See Direct Marketing Association v. Colorado Department of Revenue, Civil Case No. 10-cv-01546-REB-CBS, 03/30/2012.

Virginia Governor Signs "Amazon" Law: Virginia Governor Bob McDonnell signed "Amazon legislation" that creates a presumption of sales and use tax nexus for an out-of-state seller if a commonly controlled person maintains a distribution center, warehouse, fulfillment center, office or similar location within Virginia that facilitates the delivery of tangible personal property sold by the seller to its customers. The legislation will become effective on the earlier of Sept. 1, 2013, or the effective date of federal legislation authorizing the states to require a seller to collect taxes on sales of goods to in-state purchasers without regard to the location of the seller. See S597 for details.

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State & Local Tax Update – 2012 Legislative Update

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Katz, Sapper & Miller’s State & Local Tax Practice has released its 2012 Legislative Update, which provides a summary of the various tax and economic development legislative changes that occurred during the 2012 session of the Indiana General Assembly.

The update covers changes in areas such as sales tax, income tax, property tax, economic development and tax credits, and others. For more information on how a specific law change may affect your business, please contact the members of our State & Local Tax Practice listed in this publication.

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State & Local Tax Update - 3/30/12

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Indiana Updates EITC Bulletin: The Indiana Department of Revenue has updated its information bulletin concerning the individual earned income tax credit to reflect the state's changes to EITC. 2011 legislative bill H1001 provided that the EITC for tax years beginning after December 31, 2010, was to be calculated based on Code Sec. 32 as it existed before being amended by P.L. 111-312. P.L. 111-312 extended expiring provisions that were contained in Code Sec. 32. Indiana is not recognizing extensions contained in P.L. 111-312. See Information Bulletin 92 for details.

Missouri Department of Revenue Issues Ruling on Sales Tax Exemptions for Trucking Companies: The Missouri Department of Revenue ruled that sales by a vendor that sells products to common carriers of certain products that attached directly to a vehicle or trailer such as placards, decals, trailer seals and load tie down straps are exempt from sales and use tax because the products are used directly on motor vehicles operated by common carriers. However, the sales of certain products such as driver's logbooks, safety pocket books, vehicle inspection forms, bill of lading forms, wallet cards, and safety kits are not exempt because these items do not meet the requirement that they be used directly on motor vehicles operated by common carriers. Sales of certain products for office usage such as interactive Internet service and information access are also exempt, because no tangible personal property is received. But, sales of mileage tracking software on CDs are taxable because the software is a transfer of tangible personal property. Sales of manuals and newsletters on hazardous material handling, fleet safety compliance, and vehicle maintenance are subject to sale tax if the manuals and newsletters are transmitted in the form of tangible personal property. See LR 7068 for details.

Wisconsin Sales Tax Applies to Parking Charges for Common Carriers: The Wisconsin Department of Revenue has clarified the sales and use treatment of parking charges for common and contract carriers. Generally, parking or providing parking spaces for motor vehicles is subject to Wisconsin sales and use tax. There is no exemption for common or contract carriers; such carriers cannot claim an exemption on the vehicle that is being parked. For instance, if a contract carrier who claimed a sales and use tax exemption on its purchase of trucks because it uses the trucks exclusively as a contract carrier enters into a contract with another company to pay $100 a month to park its trucks in the company's lot in Wisconsin, the $100 charge is subject to WI sales and use tax. No exemption may be claimed. Further, while a common carrier may claim a sales and use tax on its purchase of trucks because it uses the trucks exclusively as a common carrier, parking charges to park the trucks in another company's parking lot are subject to Wisconsin sales and use tax. See 3/23/12 Article for additional information.

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Deducting Charitable Contributions: Eight Essentials

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Donations made to qualified organizations may help reduce the amount of taxes you pay. The IRS has eight essential tips to help ensure your contributions pay off on your tax return.

In addition, the IRS has released Publication 1771 (rev. September 2011), Charitable Contributions - Substantiation and Disclosure Requirements, which explains general rules and specifications for documenting charitable deductions and explains new guidelines that allow charities to electronically mail documentation to donors.

For more information, contact your KSM advisor.

Source: Internal Revenue Service

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State & Local Tax Update - 3/23/12

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Indiana Tornado Victims Assistance:  The Indiana Department of Revenue (IDOR) has provided answers to potential questions from individual and business taxpayers in counties affected by recent tornados. Taxpayer issues addressed include return filing and refunds, lost records, payment coupons and registered retail merchant certificates, and obtaining a copy of a state return to verify income. The IDOR will make every effort to work with business taxpayers that live in an area affected by severe weather and that are unable to make payment on their bills at this time in coming to a reasonable agreement for payment on a case by case basis. Contact the IDOR at 317.233.5212 to discuss with an IDOR representative.

Louisiana No Longer Accepts Federal Extension: Effective March 20, 2012, the Louisiana Department of Revenue (LDR) adopted emergency amendments to an administrative rule that govern the procedure for obtaining individual income tax return filing extensions, and corporation income and franchise tax return filing extensions. The amended rules provide that taxpayers seeking to obtain a return filing extension must request the extension by submitting a paper copy or an electronic application. The LDR no longer accepts a federal extension to file as an extension to file the Louisiana tax return. This change applies to tax returns due on or after January 1, 2012.

Nebraska Issues Guidance for Construction Contractors: The Nebraska Department of Revenue (NDR) has released a presentation on taxes for construction contractors that has been prepared by the NDR staff. The presentation: (1) provides an overview of sales and use tax laws; (2) discusses the contractor database that is used for purposes of determining whether taxes must be withheld from contractors; (3) discusses sharing of information between the Department of Labor and the NDR for purposes of determining whether persons hired are contractors or employees; (4) explains the terms “construction contractors,” “contractor labor,” “building materials” and “fixtures”; (5) explains the taxability of transactions for Option 1, Option 2 and Option 3 contractors; (6) discusses the taxability of contracts with exempt entities; (7) explains the taxability of building materials and fixtures that are used on job sites outside Nebraska; and (8) explains the taxability of the repair or annexation of exempt manufacturing machinery and equipment. See the Fact Sheet for more information.

Texas to Offer Amnesty Program:  Texas has announced Project Fresh Start, a limited tax amnesty program under which penalties and interest will be waived for taxpayers that file delinquent tax reports and pay all taxes due, or amend reports that underreported taxes and pay the taxes due. Reports originally due before April 1, 2012, are eligible for the program. The amnesty period runs from June 12 through August 17, 2012. For details on eligibility and the application procedure, see http://freshstart.texas.gov/.

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New W-2 Reporting Requirements for 2012

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When the Patient Protection & Affordable Care Act (PPACA) was passed in March 2010, a number of mandates became law. While some of these mandates have been widely discussed – such as the employer requirement to provide affordable health coverage and the requirement for individuals to buy health insurance by 2014 – other directives are not as well known. One of the lesser known mandates is the act’s new Form W-2 reporting requirement. Effective for 2012 W-2s, employers must report the cost of coverage under an employer-sponsored group health plan.

More specifically, employers must report the total cost of all “applicable employer sponsored coverage” provided to an employee. Applicable employer sponsored coverage is defined as “coverage under a group health plan that the employer makes available to the employee that is non-taxable to the employee.” In other words, employers must report the costs of major medical insurance and similar plans on employees’ W-2s. The amount reported will be comprised of both employer and employee contributions. Employee contribution amounts must include both pre-tax and after-tax contributions.

The coverage costs of the following types of plans must be indicated on 2012 Form W-2s in box 12 with a code “DD” designation:

  • Medical plans;
  • Prescription drug plans;
  • Executive physicals;
  • On-site clinics, if they provide more than minimal care;
  • Medicare supplemental policies;
  • Employee assistance programs; and
  • Dental and vision plans, unless they are “stand-alone” plans.

It is important to note that the costs of coverage under health flexible spending accounts, health savings accounts, and long-term care insurance are excluded from the reporting requirement.

In interim guidance, the IRS remarked that this additional reporting is for informational purposes only. The PPACA does not cause any previously excludable employer-provided health coverage to become taxable. According to the service, the main purpose of this legislation is to notify employees about the true cost of their healthcare coverage.

If you are a business owner it will be important to track this cost of coverage data for the entire year. If your business uses a payroll company you may consider discussing this new reporting requirement with your payroll provider in order to be aware of any additional information the provider will need.  

Below is a quick reference chart provided for your convenience that contains the new requirements for 2012 and beyond. Items listed as “optional” may be changed by future IRS rules; however, any such change will not be applicable until the tax year beginning at least six months after the date the guidance is issued.

Coverage TypeReport on form W-2Do Not Report on Form W-2Optional
Reporting
Major medicalX  
Dental or vision plan not integrated into another medical or health plan  X
Dental or vision plan which gives the choice of declining or electing and paying an additional premium  X
Health Flexible Spending Arrangement (FSA) funded solely by salary-reduction amounts X 
Health FSA value for the plan year in excess of employee’s cafeteria plan salary reductions for all qualified benefitsX  
Health Reimbursement Arrangement (HRA) contributions  X
Health Savings Arrangement (HSA) contributions (employer or employee) X 
Archer Medical Savings Account (Archer MSA) contributions (employer or employee) X 
Hospital indemnity or specified illness (insured or self-funded), paid on after-tax basis X 
Hospital indemnity or specified illness (insured or self-funded), paid through salary reduction (pre-tax) or by employerX  
Employee Assistance Plan (EAP) providing applicable employer-sponsored healthcare coverageRequired if employer charges a COBRA premium Optional if employer does not charge a COBRA premium
On-site medical clinics providing applicable employer-sponsored healthcare coverageRequired if employer charges a COBRA premium Optional if employer does not charge a COBRA premium
Wellness programs providing applicable employer-sponsored healthcare coverageRequired if employer charges a COBRA premium Optional if employer does not charge a COBRA premium
Multi-employer plans  X
Domestic partner coverage included in gross incomeX  
Military plan provided by a governmental entity X 
Federally recognized Indian tribal government plans and plans of tribally charted corporations wholly owned by a federally recognized Indian tribal government X 
Self-funded plans not subject to Federal COBRA  X
Accident or disability income X 
Long-term care X 
Liability insurance X 
Supplemental liability insurance X 
Workers' compensation X 
Automobile medical payment insurance X 
Credit-only insurance X 
Excess reimbursement to highly compensated individual, included in gross income X 
Payment/reimbursement of health insurance premiums for 2% shareholder-employee, included in gross income X 
Other SituationsReportDo Not ReportOptional
Employers required to file fewer than 250 Forms W-2 for the preceding calendar year  X
Forms W-2 furnished to employees who terminate before the end of a calendar year and request, in writing, a Form W-2 before the end of that year  X
Forms W-2 provided by third-party sick-pay provider to employees of other employers  X

Please contact your Katz, Sapper & Miller tax advisor if you have any questions about this new reporting requirement.

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Must an LLC Turn over the Valuation Records of Its Subsidiary?

Posted 3:40 PM by

DFG Wine Co., LLC v. Eight Estates Wine Holdings, LLC, C.A. No. 6110-VCN (Del. Ch.) (August 31, 2011)

The Delaware Chancery Court just provided a good checklist of documents to request and require in a "books and record" action by the controlling member of a limited liability company (LLC), particularly when the purpose of the request is to ascertain the value of the member's holdings, not just in the LLC, but in its subsidiary. In this case, the LLC held the assets of a company that owned and operated eight wine brands. When the subsidiary started to flounder, the LLC's limited partners petitioned the Delaware Chancery to access the books and records of the LLC as well as the subsidiary. The LLC objected under Delaware law, maintaining that since the subsidiary was near insolvency, the valuation was zero (or a simple matter of mathematics), so the request was "meaningless." Read more

To read the full text of Valuation Services Group newsletter, go here.


 

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Payroll Tax Cut Extended for All of 2012

Posted 2:49 PM by

On Feb. 22, 2012, the Temporary Payroll Tax Cut Continuation Act of 2011 was permanently extended for all of 2012. This extends the two percentage point payroll tax cut for employees, continuing the reduction of their social security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Dec. 31, 2012. This reduced social security withholding will have no effect on employees' future social security benefits.

As part of the legislation, the recapture provision, passed with the original legislation in December, will be repealed.

Unemployment Benefits

In addition, the legislation signed by President Obama on Feb. 22, 2012 reduces the number of weeks an individual may receive unemployment benefits from 99 weeks to 73 weeks for those living in states with an unemployment rate higher than the 8.3 percent national average.

For those in states with an unemployment rate under the national average, the number of weeks an individual may receive unemployment benefits will be reduced to as low as 40 weeks in some states. The legislation also includes a provision that allows states to drug-test unemployment beneficiaries, as well as a provision to prevent reductions in Medicare reimbursements for doctors.

Source: Paychex, Inc.


 

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New Reporting Obligation for Foreign Financial Assets

Posted 2:48 PM by

A new tax reporting obligation is being imposed on U.S. individuals that have an interest in specified foreign financial assets when the total aggregate value of those assets exceeds an applicable reporting threshold. This reporting obligation is effective starting for tax year 2011 and is satisfied by attaching Form 8938, Statement of Foreign Financial Assets, to the individual taxpayer’s 2011 Form 1040. The penalties for failing to file a required Form 8938 are severe. Thus, U.S. individuals with interests in foreign assets must carefully analyze their potential obligation to report such interest on a Form 8938 attached to their 2011 Form 1040.

Only Individuals … For Now

The IRS anticipates issuing regulations that will require certain domestic entities to file Form 8938 if such entity were formed or availed of to hold specified foreign financial assets. Until the IRS issues such regulations, only individuals must file Form 8938. The IRS has stated that they intend to issue regulations applicable to domestic entities during 2012. Thus, some domestic entities may have this filing obligation starting with their 2012 tax returns. However, the obligation will only be imposed on individuals with respect to 2011 tax returns.

Specified Foreign Financial Assets

Individuals must identify whether they have an interest in any specified foreign financial assets. For this purpose, a specified foreign financial asset is defined as:

  • Any financial account maintained by a foreign financial institution; and
  • The following assets to the extent that they’re held for investment and not held in a financial account:
    • Any interest in a foreign entity;
    • Any stock or securities issued by someone that is not a U.S. person; and
    • Any financial instrument or contract with an issuer or counterparty that is not a U.S. person.

The term “held for investment” encompasses all assets that are not used in, or held for use in, the conduct of any trade or business. Stock is never considered used or held for use in the conduct of a trade or business.

There are exceptions to the definition of “specified foreign financial asset” for assets that are subject to the mark-to-market accounting rules and for assets held in a domestic bankruptcy trust.

Applicable Reporting Threshold

Individuals that own an interest in specified foreign financial assets must then value each interest based on the highest fair market value of each asset during the tax year as well as the value of each asset as of the last day of the tax year. The Form 8938 is required if the aggregate fair market value of all the individual’s specified foreign financial assets exceeds certain thresholds. Married individuals that file a joint income tax return file a single Form 8938 that reports all the specified foreign financial assets of both spouses. The filing thresholds vary based on the individual’s filing status and whether or not the individual lives within the U.S. The following table summarizes the filing thresholds:

Filing StatusLiving InValue on Last Day of YearValue on Any Day of Year
Unmarried or Married Filing SeparatelyU.S.$50,000$75,000
Married Filing JointlyU.S.$100,000$150,000
Unmarried or Married Filing SeparatelyForeign Country$200,000$300,000
Married Filing JointlyForeign Country$400,000$600,000

Penalties

The failure to comply with the Form 8938 reporting obligation can result in significant penalties. The penalties can be waived by the IRS if the failure to file was due to reasonable cause and was not willful. However, there can be no guarantees that the failure to file penalties will be waived. There are at least seven different penalties that can be imposed with respect to Form 8938. The general failure to file penalty is $10,000 per failure. The IRS can impose an additional $10,000-per-month penalty if the failure continues after the taxpayer is notified by the IRS. If unreported income is associated with the undisclosed specified foreign financial assets, there is a 40% accuracy related penalty. The statute of limitations remains open for all or part of the tax return until three years after the date on which the required Form 8938 is filed. Furthermore, there is a special six-year statute of limitations for unreported income associated with disclosed specified foreign financial assets. Finally, fraud and criminal penalties can be imposed when there is a willful failure to file that is part of a tax evasion scheme.

The above client alert provides a brief summary of this new reporting obligation. There are significant nuance and details that are beyond the scope of this alert. Please contact your Katz, Sapper & Miller advisor to discuss specific questions that may be applicable to you.

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State & Local Tax Update - 2/24/12

Posted 2:50 PM by

Idaho Updates Guidance Regarding Sales Tax on Interstate Vehicles – Effective 7/1/12, HB 361 provides that, in the context of the tax exemption for motor vehicles and trailers substantially used in interstate commerce and registered under the International Registration Plan (IRP), “substantially used in interstate commerce” means that the vehicle or trailer is operated in a fleet that logs at least 10% of its fleet miles outside of Idaho in the four fiscal quarters beginning July 1 and ending June 30 of each year (previously, in an annual registration period) under the IRP. If such motor vehicle or trailer is not substantially used in interstate commerce during the four fiscal year quarters beginning July 1 and ending June 30 of each year (previously, during an annual registration period), it is deemed to be used in Idaho and it is subject to the Idaho use tax.

Illinois Issues Ruling on Independent Contractor and Nexus - The Illinois Department of Revenue determined that a taxpayer's contracting sales of services in Illinois on a regular basis would “likely” subject the taxpayer to Illinois income taxation. The taxpayer operates a 24/7 call center for national retailers with multi-site locations. The business consists of coordinating contracted labor on an as-needed basis for its national customers, some of them located in Illinois. The “contracted” work is done by independent contractors as the taxpayer does not have payroll, inventory, personal property or a physical presence in Illinois. However, Ill. Admin. Code 86 § 100.9720(c)(6) provides that the use of independent contractors may only afford a nonresident immunity from taxation for “limited activities.” The IL DOR indicated that the fact that the taxpayer's business is entirely set up around using independent contractors on a regular basis may jeopardize the protections otherwise afforded. See IT 12-0001-GIL for details.

 

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Glider Kits Making an Impact on the Trucking Industry

Posted 2:30 PM by

Over the past decade, the transportation industry has been transformed by the simultaneous hit of the Great Recession and the sting of stiffer EPA standards. These factors have caused several interesting byproducts, including the resurgence of glider kits. Read more

To read the full text of the Truck Times newsletter, go here.


 

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Work Opportunity Tax Credit Now Available to Qualified Tax-Exempt Organizations

Posted 12:14 PM by

The VOW to Hire Heroes Act of 2011 provides an expanded Work Opportunity Tax Credit (WOTC) to businesses that hire eligible unemployed veterans and for the first time also makes the credit available to certain tax-exempt organizations.

The Act allows employers, including qualified tax-exempt organizations, to claim the credit for qualified veterans who begin work on or after Nov. 22, 2011, and before January 1, 2013.

The credit is claimed as a credit against the employer's share of social security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.

IRS Notice 2012-13 contains additional guidance for tax-exempt employers claiming the credit.

Note: For purposes of the credit, a qualified tax-exempt organization is "an employer that is an organization described in section 501(c) and exempt from taxation under section 501(a)."

For more information, including how to claim the credit, read the IRS news release and related materials (including FAQs), or contact your KSM advisor.

Source: Internal Revenue Service


 

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State & Local Tax Update - 2/3/12

Posted 2:58 PM by

Indiana Use Tax Not Due on Promotional Items: An Indiana corporation was not liable for use tax on items it manufactured and pulled from its inventory in Indiana for use as promotional items in other states because the items were only temporarily stored in Indiana for subsequent use outside Indiana. The items were consumed in the course of demonstrations at non-Indiana locations. The products did not return to Indiana. This is temporary storage for use outside Indiana and does not constitute storage subject to Indiana use tax. See LOF 04-20110134 for more information.

Connecticut To Issue Debit Cards for Refunds: The CT Department of Revenue Services will issue personal income tax refunds in the form of debit cards, rather than checks, to taxpayers who do not use direct deposit. DRS has contracted with JP Morgan Chase to administer the debit card program. Taxpayers will have to call Chase to activate the card and select a PIN. The debit card can be used at ATMs; banks and credit unions displaying the VISA logo; gas stations and retail locations that accept VISA. If the taxpayer does not activate the debit card within 365 days, the debit card account will be closed and the available balance will be returned to DRS. If the debit card is activated and a balance remains, after the 12th consecutive month of inactivity (365 consecutive days of inactivity), Chase will begin charging an inactivity fee of $1.00 per month. Visit the FAQs for more information on the program.

Kentucky Requires Estimates of Nonresident Withholding for 2012: Effective for taxable years beginning after December 31, 2011, every pass-through entity required to withhold Kentucky income tax will be required to make a declaration and pay estimated tax if : (1) the nonresident individual owner's tax liability can reasonably be expected to exceed $500; and/or (2) a corporate owner doing business in Kentucky only through its ownership interest in a pass-through entity has a tax liability that can reasonably be expected to exceed $5,000. When withholding on the distributable share income of nonresident individuals, estates, trusts and corporations, no withholding is made for partners or members that are pass-through entities. The distributive share income will continue to pass through as Kentucky source income requiring withholding at each level of each pass-through entity of multiple tier structures. Therefore, withholding, as well as the calculation to determine if an entity is required to make declaration payments, will be at each level of the structure using only the nonresident individual and corporations doing business in Kentucky only through their ownership interest in the pass-through entity. Trusts and estates are entities treated as individuals and are included in the withholding requirement. See KY Tax Alert 1 for additional information.

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State & Local Tax Update - 1/20/12

Posted 3:40 PM by

Indiana Updates Sales Tax Guidance for Colleges and Universities:  The IDOR has revised Information Bulletin 68 concerning nonprofit and state colleges and universities to include separate sales tax treatment for colleges and universities that operate as nonprofit organizations and those that operate as governmental agencies. Indiana state colleges and universities that are nonprofit organizations or governmental agencies are entitled to certain exemptions from sales and use tax for purchases and sales that support the exempt government function or educational mission of the institutions. Transactions that do not support the exempt educational mission of a nonprofit educational institution or that are associated with a proprietary activity on the part of a state government educational institution are subject to tax. The bulletin details: purchases and sales by nonprofit colleges and universities; purchases and sales by state colleges and universities; application of the key terms “educational materials,” “proprietary activity,” “accommodations,” and “student”; furnishing or selling intrastate telecommunication services; and student organizations at state colleges and universities.

Missouri Upholds Use Tax on Repair Parts: The MO Sup Ct. held that a company that provides maintenance and repair services for mainframe computers is liable for use tax on parts it purchased and used in fulfilling maintenance contracts because it engaged in taxable use in MO. The company did not just store the parts temporarily in MO, but unpacked, inspected, tested, and repackaged the parts then certified them for use and shipped them to its customers. Further, it was not entitled to resale exemption because it did not purchase the parts for subsequent taxable sale. For more information, see Custom Hardware Engineering & Consulting Inc. v. Director of Revenue.

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2012 IRS Workshops for Small and Medium-Sized 501(c)(3) Organizations

Posted 10:21 PM by

Start off the new year right by planning to attend one of the Internal Revenue Service's (IRS) workshops for small and mid-sized 501(c)(3) organizations.

Registration is now available for the following workshops:

Montgomery, AL (Jan. 24, 2012) and Mobile, AL (Jan. 26, 2012) hosted by Auburn University

Bloomington, IN (Feb. 28) and Indianapolis, IN (Feb. 29, 2012) hosted by the Indiana University - Bloomington School of Public and Environmental Affairs and the Center on Philanthropy at Indiana University

South Orange, NJ (March 14, 2012) hosted by Seton Hall University

Glassboro, NJ (March 15, 2012) hosted by Rowan University

For more information on additional workshops, please visit the IRS website.

Each one-day workshop, presented by experienced IRS exempt organizations specialists, will explain what 501(c)(3) organizations must do to keep their tax-exempt status and comply with tax obligations. This popular introductory workshop is designed especially for administrators or volunteers who are responsible for an organization's tax compliance as well as those interested in careers in the nonprofit sector.

Source: Internal Revenue Service

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Electronic Filing of Some Tax-Exempt Forms Delayed to March 30

Posted 9:16 PM by

The Internal Revenue Service (IRS) recently announced that the filing date for tax-exempt organizations with annual returns due in January and February will be March 30, 2012.

The extension applies to organizations that electronically file Forms 990, 990-EZ, 990-PF, or 1120-POL. Form 990-N filers are not affected and no form needs to be filed to get the March 30 extension.

The IRS explained that it moved the filing deadline because the part of the service's modernized e-File system will be offline during January and February.

The IRS has issued Notice 2012-4, which provides more details about the deadline extension.

Source: Internal Revenue Service

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State & Local Tax Update - 1/13/12

Posted 10:53 PM by

Indiana and Amazon Agree on Tax Collection
Indiana Governor Mitch Daniels has announced that amazon.com will begin collecting Indiana sales tax on Internet purchases under an agreement reached between Amazon and the IDOR. Amazon will voluntarily begin to collect and remit Indiana sales tax beginning Jan. 1, 2014, or 90 days from the enactment of federal legislation, whichever is earlier. Indiana will not assess the company for sales tax for other periods. See the governor's news release for additional details.

Michigan Amends Apportionment Calculation
Effective Jan. 1, 2012, the Michigan sales factor numerator of a corporate taxpayer must include its proportionate share of the total sales in Michigan of a flow-through entity that is unitary with the taxpayer. The denominator of a taxpayer must include its proportionate share of the total sales everywhere of a flow-through entity that is unitary with the taxpayer. A flow-through entity is unitary with a taxpayer when that taxpayer owns or controls, directly or indirectly, more than 50 percent of the ownership interests with voting rights or ownership interests that confer comparable rights to voting rights of the flow-through entity, and that has business activities or operations which result in a flow of value between the taxpayer and the flow-through entity, or between the flow-through entity and another flow-through entity unitary with the taxpayer, or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. Sales between a taxpayer and flow-through entities unitary with that taxpayer, or between flow-through entities unitary with a taxpayer, must be eliminated in calculating the sales factor. See SB 673 for details of the new law.

Michigan to Follow Federal Classification for Disregarded Entities
Effective retroactive for taxes levied on and after Jan. 1, 2008, Michigan law has been amended to provide that a person that is a disregarded entity for federal income tax purposes under the Internal Revenue Code must be classified as a disregarded entity for purposes of the MBT. This legislation negates the requirement outlined in Notice to Taxpayers Regarding Federally Disregarded Entities for entities to amend prior year MBT returns to separate activities of disregarded entities resulting from the Kmart decision. See SB 369 for additional information.

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Reporting of 2011 Organizational Actions Affecting Basis of Securities Due January 17

Posted 8:03 PM by

The IRS has released a new form, Form 8937, for the reporting of transactions that affect a security holder's basis. Examples of transactions that may require Form 8937 are stock splits, stock dividends, nontaxable dividends, mergers, and acquisitions. This form is required retroactively to report transactions occurring on or after Jan. 1, 2011.

Form 8937 has two parts. Part I is the general information regarding the reporting entity. Part II requires the information related to the specific transaction.

Who must file: Any taxpayer that takes an organizational action that affects the basis of all holders of the security.

Exceptions: Form 8937 is not required to be filed with the IRS if, by the due date of the form, a completed Form 8937 is posted to a primary public website. In addition, the form is not required if all the holders of the security are exempt recipients.

Special rules: S corporations can satisfy the reporting requirement by reporting any actions that affect the basis of the stock on a timely filed Schedule K-1 for each shareholder and timely gives a copy to all proper parties. A real estate investment trust (REIT) that reports undistributed capital gains to shareholders on Form 2439 satisfies the reporting requirements if Form 2439 is timely filed and given to all the proper parties.

Due date: For transactions occurring during 2011, the form is due Jan. 17, 2012. For transactions occurring after Dec. 31, 2011, the due date for Form 8937 is the earlier of: (1) the 45th day following the transaction; or (2) Jan. 15th of the year following the calendar year of the transaction.

For more information, please contact your KSM advisor.

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DOL Raises the Stakes for the Audit Quality Initiative

Posted 10:28 AM by

The Department of Labor (DOL) is intensifying its audit initiatives for employee benefit plans (both retirement plans and health and welfare plans). DOL has two primary initiatives. First, DOL targets and selects plans based on its own internal criteria which it does not share with the public. Second, DOL selects audits performed on "large" plans with over 100 participants and "audits the auditor" by examining the workpapers of the audit firm who performed the audit.

In either case, DOL may reject a Form 5500 filing found to be incomplete or inadequate. Penalties can be as high as $1,100 per day (capped at $50,000).

Plan Administrators need to be diligent in selecting an auditor for their benefit plan audits who adheres to the highest standards of quality and has considerable experience auditing employee benefit plans. The audit firm should be a member in good standing of the AICPA Employee Benefit Plan Audit Quality Ceneter.

In order to monitor the outcome of an employee benefit audit, the Plan Administrator should ask the auditor:

  • Whether plan assets are reported at fair value;
  • Whether contributions were made completely and in a timely manner;
  • Whether benefit payments were made in accordance with plan provisions;
  • Whether assets have been properly allocated to participant accounts;
  • Whether the tax status of the plan has been compromised; and
  • Whether any transactions prohibited under ERISA were noted.

A quality audit of an employee benefit plan is in the best interests of plan participants and fulfills a fiduciary obligation of the Plan Sponsor.

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