4th Annual Tax Update

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Insero & Company's 4th Annual Tax Update presented by
Steven Mills, CPA, Partner, Insero & Company CPAs, P.C.
Don Susswein, Principal, McGladrey LLP
Mark Peterson, President & CEO, Greater Rochester Enterprise

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  • ACA not valid under the Commerce Clause or Necessary Clause, but valid under Congress’s tax power.
  • ACA not valid under the Commerce Clause or Necessary Clause, but valid under Congress’s tax power.
  • 4th Annual Tax Update

    1. 1. 4th Annual Tax UpdatePresented bySteven Mills, CPA, Partner, Insero & Company CPAs, P.C.Don Susswein, Principal, McGladrey LLPMark Peterson, President & CEO, Greater Rochester EnterpriseJune 18, 2013Insero & Company CPAs, P.C. presents the
    2. 2. StevenMills,CPASteven Mills, CPA is a Partner and TaxPractice Leader for Insero & CompanyCPAs, P.C. with over 25 years ofexperience in public accounting. Hisexperience includes domestic,international and state and local taxeswith a focus on planning and research.Steve is a hands-on leader responsiblefor all of the firms tax services includingrecurring compliance as well as thedevelopment, design andimplementation of tax strategies.
    3. 3. DonSussweinDon Susswein, Principal, McGladrey LLPleads the Washington National Tax teamin the areas of partnerships (subchapterK) and the taxation of debt and otherfinancial instruments or products. Hisextensive background in governmentand consulting includes serving asMajority Tax Counsel to the U.S. SenateCommittee on Finance, an attorney inthe Honors Program of the AppellateSection of the Tax Division of theDepartment of Justice, and as a partnerat KPMG and PwC.
    4. 4. MarkPetersonMark Peterson, President & CEO ofGreater Rochester Enterprise (GRE) hasan outstanding background in regionaleconomic development, financialadministration, and high-value fundraising. Recruited to join GRE asManaging Director in 2005, Mark wasnamed President & CEO in early 2009and charged with the continued creationand execution of GREs strategic plan.
    5. 5. “Anyone may arrange his affairs so that his taxes shall be aslow as possible; he is not bound to choose that patternwhich best pays the treasury. There is not even a patrioticduty to increase one’s taxes. Over and over again the courtshave said that there is nothing sinister in so arranging affairsas to keep taxes as low as possible. Everyone does it, rich andpoor alike and all do right, for nobody owes any public dutyto pay more than the law demands.”- Judge Learned HandGregory V. Helvering (1934)- Timothy CookApple CEO (2013)
    6. 6. Selected Tax Issues asof 1/1/13What Was Scheduledto HappenWhat DidHappen1. All Individual Tax Brackets Go up to 2001 ratesStayed as is except fortop bracket (39.6%)2. Alternative Minimum TaxExemption$45,000$78,750(“permanent” andindexed for inflation)3. Dividend Rates According to Tax BracketTreated as LTCG(“permanent” change)
    7. 7. Selected Tax Issues asof 1/1/13What Was Scheduledto HappenWhat DidHappen4. LTCG Rates 20%0/15/20%(“permanent” rate)5. Medicare tax on netunearned income at$250,000 (MFJ) of AGI3.8% 3.8%6. Section 179 $139,000$500,000 for 2013then $25,000thereafter
    8. 8. Selected Tax Issues asof 1/1/13What Was Scheduledto HappenWhat DidHappen7. Limitation on ItemizedDeductions at $300,000(MFJ) of AGIReinstated Reinstated8. Phase out of PersonalExemptions at $300,000(MFJ) of AGIReinstated Reinstated9. Bonus Depreciation % 0%50% in 2013 (0%thereafter)
    9. 9. Selected Tax Issues asof 1/1/13What Was Scheduledto HappenWhat DidHappen10. Medicare tax on earnedincome over $250,000 (MFJ)of AGI0.9% 0.9%11. Payroll tax (employeeportion)6.2% 6.2%12. Estate Exemption $1,000,000 not portable$5,250,000 portable(permanent)
    10. 10. Selected Tax Issues asof 1/1/13What Was Scheduledto HappenWhat DidHappen13. Estate Tax Rates 50% + 40% (from 35%)14. R & D Credit Expired Extended to 12/31/13
    11. 11. Recommendations1. Time your capital gains in portfolio if possible• Coordinate with pass thru losses• Harvest other capital losses• Spread gains over multiple tax years if you can take therisk
    12. 12. Recommendations2. Do not try to form a 501(c)(4) organization with thewords “Tea Party,” “Constitution,” etc.
    13. 13. Recommendations3. Get tax planning/projections done if you really wantto know the tax effects of a transaction or forwithholding purposes. It is IMPOSSIBLE to do taxplanning/projection without some effort.
    14. 14. Recommendations4. Know that Big Brother is watching ever morecarefully• IRS has been issuing “Review” letters• First time I’ve ever seen these• The word “Audit” is not mentioned• Matching by computer is expanding (Example of SmallBusiness Health Care Credit form)• More auditors• Employee Benefit Audit Checklist now surfacing• Affordable Care Act – alleged increase in IRS employmentof 14,000 people – what will they do?
    15. 15. Recommendations5. Understand how the Affordable Care Act will ImpactYou (and get help if necessary)
    16. 16. Questions?
    17. 17. ThankYouThank you for your attendance attoday’s program.For more information regarding the topics discussedtoday, please feel free to contact:Steven Mills, CPAsteven.mills@inserocpa.com585.697.9629Insero & Company CPAs, P.C.www.inserocpa.com
    18. 18. MaterialDisclaimerThese materials were prepared solely for thepurpose of continuing professional education. Theyare distributed with the understanding that Insero &Company CPAs, P.C. and its employees are notengaged in rendering legal, accounting, or otherprofessional service as part of this CPE presentation.If advice or other expert assistance is required, theservices of a competent professional person shouldbe sought. Please contact an Insero & Companyteam member with any questions.
    19. 19. © 2013 McGladrey LLP. All Rights Reserved.© 2013 McGladrey LLP. All Rights Reserved.June 18, 2013Washington Update
    20. 20. © 2013 McGladrey LLP. All Rights Reserved.Today’s presenter20Don SussweinPrincipalWashington National Taxdon.susswein@mcgladrey.com
    21. 21. © 2013 McGladrey LLP. All Rights Reserved. What happened to my taxes on New Year’s Eve? Will they change again – and when? Do we have a tax problem? Does everyone pay their “fair share” of taxes? Do we need a Buffett rule? Do we have a spending problem? Do deficits – as a percentage of GDP – matter? Will there be “tax reform”? Is Obamacare a new entitlement program? Who really pays the costs of the Affordable Care Act?Topics of Interest
    22. 22. © 2013 McGladrey LLP. All Rights Reserved.Important Tax Policy Themes of the 20th Century “Federal Insurance Contributions Act” - 1935 “A rising tide lifts all boats” - 1963 “154 [Millionaires] Who Didn’t Pay Any Taxes” - 1969 “Tax expenditure” - 1967 “The tax code is a disgrace to the human race” - 1976 “Broaden the base, lower the rates.” - 1986
    23. 23. © 2013 McGladrey LLP. All Rights Reserved.What is the Buffett Rule?
    24. 24. © 2013 McGladrey LLP. All Rights Reserved. "People making more than $1 million a year should notpay a smaller share of their income in taxes than middle-class families pay.” "Middle-class families shouldnt pay higher taxes thanmillionaires and billionaires . . . Thats prettystraightforward. Its hard to argueagainst that.” Capital gains should not be taxed at a lower rate thanordinary income.What is the Buffett Rule?
    25. 25. © 2013 McGladrey LLP. All Rights Reserved.“The taxing power of government must be used to provide revenuesfor legitimate government purposes. It must not be used to regulatethe economy or bring about social change. Weve tried that, andsurely we must be able to see it doesnt work.”Another Point of View
    26. 26. © 2013 McGladrey LLP. All Rights Reserved.Tax Rates - 1988 vs. 2013Then NowCapital gains and ordinary incometaxed at top rate of 28%.Top ordinary rate 39.6%(plus potential3.8%) capital gains and dividends varyfrom 15 to 20% (plus potential 3.8%)Estate tax rate of 55%, for estates over$1.2 million (2013 dollars)Estate tax rate of 40%, for estates over$5.12 million (2013 dollars)Business income predominantly in“double tax” corporate tax systemMore than one-third of Americanbusiness conducted in pass-throughs(saving between 7% and 10%)
    27. 27. © 2013 McGladrey LLP. All Rights Reserved.$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000$18,000$20,000BillionsofDollarsBusiness Receipts of Pass-throughs Now Exceed50% of C-Corp Business ReceiptsC Corp Business Receipts Passthrough Business Receipts (S-Corp and P-ship)
    28. 28. © 2013 McGladrey LLP. All Rights Reserved.Federal Revenues By Source28
    29. 29. © 2013 McGladrey LLP. All Rights Reserved.Tax Reform: 1986 vs. Now Consensus for broad base, low rates- No consensus now as to what “reform” means Personal commitment of PresidentReagan, Senator Bill Bradley, and others- No strong champions for “reform” 1982 and 1984 “dress rehearsals” 8% individual cut, 30% corporate hike- No cuts in store No popular items eliminated- Only popular items “in play” We now know the low rates didn’t last!29
    30. 30. © 2013 McGladrey LLP. All Rights Reserved. 2011 Spending: Approx. $3,600,000,000,000.00 Deficit: Approx. $1,300,000,000,000.002012 ESTIMATES 2012 Revenues: $2.469 Trillion 2012 Spending: $3.795 Trillion Deficit: $1.326 Trillion30Do we have a deficit problem?
    31. 31. © 2013 McGladrey LLP. All Rights Reserved.Maybe Deficits Don’t Matter?31
    32. 32. © 2013 McGladrey LLP. All Rights Reserved.Maybe Deficits Do Matter?32
    33. 33. © 2013 McGladrey LLP. All Rights Reserved.What questions would a CFO ask?33
    34. 34. © 2013 McGladrey LLP. All Rights Reserved.0.0%5.0%10.0%15.0%20.0%25.0%30.0%Taxesas%ofAGIAGIINCOME TAX PAYMENT RATES (TAXES/AGI) BY INCOME CLASS AT75K TO $100K – ABOUT 8%ABOVE $1 MILLION -- ABOUT 25%
    35. 35. © 2013 McGladrey LLP. All Rights Reserved.$0$200,000,000,000$400,000,000,000$600,000,000,000$800,000,000,000$1,000,000,000,000$1,200,000,000,000$1,400,000,000,000$1,600,000,000,000TotalAGIByIncomeGroupAGIONE PERCEPTION OF THE DISTRIBUTION OFINCOME POTENTIALLY SUBJECT TO TAX
    36. 36. © 2013 McGladrey LLP. All Rights Reserved.$0$200,000,000,000$400,000,000,000$600,000,000,000$800,000,000,000$1,000,000,000,000$1,200,000,000,000$1,400,000,000,000$1,600,000,000,000$1,800,000,000,000$2,000,000,000,000TotalAGIByIncomeGroupAGIAPPROXIMATE AGGREGATE TOTAL INCOME AT DIFFERENT AGILEVELS BASED ON IRS STATISTICS FOR 2009
    37. 37. © 2013 McGladrey LLP. All Rights Reserved.What about payroll taxes and mandates?Are Social Security Payroll Taxes “Taxes” – Or Mandatory InsurancePremiums?Are Mandatory Insurance Premiums “Premiums” – or Taxes?
    38. 38. © 2013 McGladrey LLP. All Rights Reserved.DepressionEra Adults"GreatestGeneration"EarlyBoomersLateBoomersYear of Birth 1895 1915 1945 1965Age in 1933 38 18Age in 1942 47 27Age now 116 96 66 46Benefits 297,000$ 595,000$ 906,000$ 1,226,000$Taxes 36,000$ 209,000$ 704,000$ 971,000$Taxes/Benefits 12% 35% 78% 79%Source: Urban InstitutePortion of Retirees Lifetime Social Security and Medicare Benefits"Paid For" By Payroll Taxes on Employers and EmployeesSource: Urban Institute
    39. 39. © 2013 McGladrey LLP. All Rights Reserved.$-$200,000$400,000$600,000$800,000$1,000,000$1,200,000$1,400,000Depression EraAdults, Retiring1960"GreatestGeneration" -Retiring 1980Early Boomers-Retiring 2010Late Boomers -Retiring 2030Portion of Retirees Lifetime Social Security and MedicareBenefits "Paid For" By Payroll Taxes on Employers andEmployeesSource: Urban InstituteFunded Portion Unfunded Portion
    40. 40. © 2013 McGladrey LLP. All Rights Reserved.Are The ACA Mandates Disguised Payroll Taxes? Employer and Employee shares of health costs look like payroll taxes- On $25,000 of wages – worker’s FICA taxes are $1,912- On $25,000 of wages – employer’s FICA taxes are $1,912- For $25,000 single wage-earners – worker’s cost is $2,300- For $25,000 single wage-earners – employer’s cost is $2,700- For large employer opting out – cost is $3,300 per worker
    41. 41. © 2013 McGladrey LLP. All Rights Reserved.For America’s largest companies? No big changes for most of America’s largest corporations orother employers that already provide their workers with moreor better insurance benefits than the Affordable Care Act(ACA) requires41
    42. 42. © 2013 McGladrey LLP. All Rights Reserved.Other “large” employers (over 49 FTEs) “Large” employers must offer partially subsidized healthinsurance–or pay a penalty that in most cases will be moreexpensive than providing the insurance Most “large” employers will have little reason not to providethe relatively modest subsidies required to avoid penalties42
    43. 43. © 2013 McGladrey LLP. All Rights Reserved.Individual mandates Workers (and other Americans) must carry insurance or paypenalties Some will reject insurance–knowing they can use theemergency room or get insurance later The penalties may be too small to encourage participation43
    44. 44. © 2013 McGladrey LLP. All Rights Reserved.Tax credit subsidies? Tax credits are available for some middle- and lower-incomefamilies, but on a very restricted basis44
    45. 45. © 2013 McGladrey LLP. All Rights Reserved.What about gross premium costs? News reports indicate that new coverage and pricingrequirements are likely to increase gross insurance costs inthe individual and small group markets45
    46. 46. © 2013 McGladrey LLP. All Rights Reserved.Example–Will employer “pay or play?” Assume employees are all age 43, married with twochildren, and making $40,000 Least costly “bronze” policy for worker-only costs $5,000 Worker can be charged as much as $3,800 Employer only required to pay $1,200 Children and spouse may be required to pay full price- $1,200 of deductible insurance costs, $780 after taxes, compared to a$2,000 nondeductible penalty- Even the $1,200 may ultimately be passed on in reduced wages for non-minimum wage workers46
    47. 47. © 2013 McGladrey LLP. All Rights Reserved.Why some workers will reject coverage For a $40,000 wage-earner, self-only premiums may cost$3,800 Covering a spouse may cost $5,000 Covering children may cost $3,500 Total (before deductibles) is $12,300 No tax credits are available Tax penalty (in 2016) for going without insurance is only $2,100 Emergency rooms will still be open Insurance can be obtained later if someone becomes sick47
    48. 48. © 2013 McGladrey LLP. All Rights Reserved.Example of tax credits Large-company worker, age 43, making $40,000, spouseworks part-time making $10,000, two children No credits for anyone if worker offered self-only policy for$3,800 Adding spouse and children brings total cost to $12,300 Identical worker for “small” company gets tax credits of$9,800–reducing cost to $3,50048
    49. 49. © 2013 McGladrey LLP. All Rights Reserved.More on tax credits (a sleeping giant?) Unavailable for any family member if either spouse is offeredan “affordable” self-only policy Could make jobs with “small companies” more desirable Could encourage husband and wife to replace two full-timepositions with four part-time jobs Could be viewed as a “marriage penalty”49
    50. 50. © 2013 McGladrey LLP. All Rights Reserved.Big picture questions Will anything be done to actually lower gross costs? Will costs spiral in the small group and individual market ifonly the sick participate? Will the tax credits (or expanded Medicaid benefits) be viewedas unfair? Will labor markets (or family structures) be adversely affectedby tax credit rules and exemptions for “part-time” workers?50
    51. 51. © 2013 McGladrey LLP. All Rights Reserved.Policy options? Allow less-expensive “catastrophic” policies? Apply prorated employer penalty to part-time employees? Treatment of “Cadillac” plans? Changes to tax credit rules?51
    52. 52. © 2013 McGladrey LLP. All Rights Reserved.New health insurance exchange/marketplace Starting in 2014, theexchange or marketplacewill offer individuals andsmall businesses a choiceof health plans that meetcertain benefits and coststandards52
    53. 53. © 2013 McGladrey LLP. All Rights Reserved.Timeline Exchanges- Oct. 1, 2013: Open enrollment for 2014 starts- Jan. 1, 2014: Exchanges will be operational53
    54. 54. © 2013 McGladrey LLP. All Rights Reserved.Exchanges by state 19 enacted (includes D.C.) 7 partnerships 25 defaulted to federal54
    55. 55. © 2013 McGladrey LLP. All Rights Reserved.Affordable Care Act–summary55Employees Buy health insurance or pay penalty- $ ($95,$325,$695) or % (1,2,2.5) in2014,2015,2016 0.9% Medicare tax on wages over$200,000 FSA employee limit of $2,500 Potential tax credit if employer does notprovide insurance or the insurance offeredis inadequate or unaffordableEmployers Minimum essential coverage if 50 or greater full-timeemployees plus full-time equivalents (FTEs)- Controlled group test- Full-time employees average 30+ hrs/ week- Part-time employees are aggregated FTEs- Calculated on the prior-year employees- Calculated each month Withhold 0.9% on wages over $200,000 (no employercontribution) W-2 in 2012: Include value of benefits on W-2 if greaterthan 250 W-2s in the prior year Penalty #1: Failure to offer minimum essential coverage.$2,000 nondeductible penalty on all full-time employees(minus first 30 employees). Only applies if any employeereceives tax-subsidized health insurance Penalty #2: Failure to offer affordable coverage. If morethan 9.5% of the employee’s W-2, Box 1 income ischarged to the employee for coverage and the employeedeclines employer coverage and gets tax-subsidizedcoverage, then a $3,000 nondeductible penalty for eachsuch employeeInsurance Exchange In 2014
    56. 56. © 2013 McGladrey LLP. All Rights Reserved.Affordable Care Act56Large employer?Health insurance to FTEs?Minimum coverage?Minimum value?Affordable?Explore Small Business Health Care TaxCredit; consider insurance exchange$2,000 non-deductible penalty on all full-timeemployees (less first 30 EEs)2,000 non-deductible penalty on all full-timeemployees (less first 30 EEs)$3,000 non-deductible penalty for eachemployee receiving subsidy$3,000 non-deductible penalty for eachemployee receiving subsidyNoYesYesYesYesNoNoNoNo
    57. 57. © 2013 McGladrey LLP. All Rights Reserved.Thank you57Washington UpdateDon Susswein, PrincipalWashington National Taxdon.susswein@mcgladrey.com
    58. 58. © 2013 McGladrey LLP. All Rights Reserved.DisclaimerThe information contained herein is general in nature and based onauthorities that are subject to change. McGladrey LLP guarantees neither theaccuracy nor completeness of any information and is not responsible for anyerrors or omissions, or for results obtained by others as a result of relianceupon such information. McGladrey LLP assumes no obligation to inform thereader of any changes in tax laws or other factors that could affect informationcontained herein. This publication does not, and is not intended to, providelegal, tax or accounting advice, and readers should consult their tax advisorsconcerning the application of tax laws to their particular situations.Circular 230 DisclosureThis analysis is not tax advice and is not intended or written to be used, andcannot be used, for purposes of avoiding tax penalties that may be imposedon any taxpayer.McGladrey LLP is the U.S. member of the RSM International (“RSMI”)network of independent accounting, tax and consulting firms. The memberfirms of RSMI collaborate to provide services to global clients, but areseparate and distinct legal entities which cannot obligate each other. Eachmember firm is responsible only for its own acts and omissions, and not thoseof any other party.McGladrey, the McGladrey signature, The McGladrey Classic logo, Thepower of being understood, Power comes from being understood andExperience the power of being understood are trademarks of McGladrey LLP.© 2013 McGladrey LLP. All Rights Reserved.McGladrey LLP1501 M Street, Suite 340Washington, D.C.888.811.1023www.mcgladrey.com
    59. 59. June 18, 2013
    60. 60. Greater Rochester Enterprise’sMissionGreater Rochester Enterprise supportsbusiness attraction and expansion, aswell as entrepreneurship and innovation.GRE collaborates with companies,universities, not-for-profit organizationsand government leaders to deliver aunified approach to regional economicdevelopment.
    61. 61. Finger Lakes RegionFinger Lakes Region Population: 1,216,188Total Workforce: 608,500Geographic Size:Comprised of 9 counties inUpstate New York:Genesee, Livingston, Monroe,Ontario, Orleans, Seneca,Wayne, Wyoming and Yates6,727 total square miles – Biggerthan Connecticut, Delaware,Rhode Island, and DCSources: U.S. Census data, 2011; NYS Dept of Labor, November 2012
    62. 62. Rochester – Steady and StableLargely a small to mid-size company town• “Big Four” no longer dominate localeconomy• 97% of companies employ fewer than 100peopleHighly diversified economy• Rich agricultural as well as high tech assets• Healthcare and education leading sectors;steady despite downturn in economy
    63. 63. Food Processing andAgricultureEducation and Knowledge CreationMajor Industry StrengthsOptics and ImagingLife SciencesEnergy InnovationBusiness Servicesand SoftwareAdvancedManufacturingHealth Care
    64. 64. Competitive AdvantagesSize, breadth, and quality of higher educationProximity to major metropolitan areas without thehigh cost Rochester is within 500 miles of 1/3 of the US andCanadian populationAvailability of 7% of world’s fresh water is right here Other regions of the country envy our water supplyFresh WaterLow Cost, High Quality Health CareWorkforce – “Labor Cubed” High caliber – skilled and educated Available – Competitive wages
    65. 65. National Accolades for Rochester#1 Best Place to Buy a Home (Zillow & Forbes)3rd Best Place in the Country to Raise A Family7th Fastest-Recovering City14th Most Innovative City in the U.S.America’s 10th Smartest CityOne of Safest Weather Citiesin the U.S.3rd Best Economy in the U.S.46th Best Economy in the worldOne of Editor’s Top 7 Location Picks4th Best Food Processing Region in U.S.Best City in U.S. for Commuters5th Best City for Families10 Greater Rochester high schoolsamong top 3% of“America’s Best High Schools”Most Livable Bargain MarketOne of 35 innovationhubs in the country10 Cities Poised for Greatness in 2012One of Ten UnderratedHotbeds of AmericanInnovation32nd Best Cityin U.S.
    66. 66. New Innovative Start Up Companies
    67. 67. Explosive Growth of Existing Businesses
    68. 68. New Companies-Thousands of New Jobs
    69. 69. Multiplier Effect is Significant$500 Million in New Capital Investmentfrom top 10 projectsCreation of Thousands of New JobsInitial capital investment plus impact ofjob creation equals total wealthcreation output of $1.2 Billion
    70. 70. Finger Lakes RegionalEconomic DevelopmentCouncil
    71. 71. $165 Million2011-2012 Priority Projects• EBP Revitalization / NY BEST• Health Sciences Center forComputational Innovation• Finger Lakes Business AcceleratorCooperative• GRE Regional Economic Gardening• Seneca AgBio Green Energy Park• Finger Lakes Museum• Finger Lakes Health Collaborative• 1-390 Southern Corridor
    72. 72. $165 Million2011-2012 Priority Projects (cont’d)• Golisano Institute for SustainabilityBuilding• Regional Revolving Loan Fund• Midtown Tower• College Town• Workforce Development - MiddleSkills Jobs• STAMP• Finger Lakes Small BusinessExpansion Fund
    73. 73. Benefits of Regional CouncilsDevelop 5-year strategic plans– Focus on long-term, sustainable regionaleconomic growthAlign state resources with priority projectsIdentify public and private sector resourcesReduce obstacles to growthContinually update and improve strategies
    74. 74. GRE Going Mobile – KeepCompetitive AdvantageFree Mobile app - RochesterBiz• Why Rochester Rocks• Available Sites & Buildings• Podcasts of Radio Show• Workforce Data
    75. 75. Questions?

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