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Archive for the ‘Taxation’ Category

After more than a year’s worth of wrangling (and our yapping about it here and here), our elected officials in Washington finally made a deal to settle the uncertainty surrounding the estate tax.  Naturally, they could not come to a long term agreement.  But, they patched the hole, and at least until the end of 2012, we know what the federal tax will look like.

The estate tax now in place includes an exclusion of $5 million – that is, no estate worth less than $5 million is subject to the tax and estates worth more are not taxed on the first $5 million.  The maximum tax rate for taxable estates is 35%.  But, like the last time this deal came around, it isn’t permanent – it applies only through the end of 2012.  Come January 1, 2013, the law reverts to its old formula, with a $1 million exclusion and a 55% top tax rate.   It seems like a pretty safe bet, then, that we’ll be having this fight again at the end of next year.

 

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Finally, the debate is over and Congress passed a health insurance reform bill.  Whether or not the Senate passes the companion reconciliation bill passed by the House of Representatives, insurance reform is now the law.  There are plenty of folks willing to tell you why the new law is the best thing since sliced bread or the worst thing since nails on chalkboard (a USA Today columnist took both sides and said that while the reform bill “stinks,” the status quo “stinks worse”), but that’s not why we’re here.  We want to talk to you about what the bill means – and does not mean – for small business owners.

First off, small business owners do not have to buy insurance for their employees.  If your small business has fewer than fifty employees, there is no obligation or penalty for failing to provide insurance.  If a small business has more than fifty employees, then there is a penalty per employee, per year (depending on what the Senate does, the penalty will be either $750 or $2,000).  But, while that number sounds scary – it is a bit misleading – more than 95% of all small businesses have fewer than fifty employees and more than 97% of businesses with more than fifty employees already offer coverage to their employees.  So, this fee will hit a tiny fraction of small businesses (We couldn’t find any hard numbers showing Rhode Island employers that might fit into this classification).  And, the businesses it does hit will be able to exclude their first thirty employees from the penalty calculation.

So, small businesses are not required to buy coverage, but the bill provides subsidies for those who choose to do so.  Small businesses are eligible for tax credits of 35% of their employees’ premiums this year, expanding to 50% over the next two years.  After that, beginning in 2014, small businesses will be able to buy coverage on state exchanges, where small businesses will be able to pool together to use their combined purchasing power to get rates more in line with those paid by big businesses.

There is a lot of information – and, sadly, a lot of misinformation – out there about the bill and its effects.  In addition to the pieces linked above, Small Business Majority wrote a good summary that is worth your time.  As always, if you have any questions, feel free to contact us.

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As we’ve discussed previously, right now there is no estate tax.  As a result of a prior tax deal, the estate tax was phased out as of January 1, 2010 and is scheduled to return on January 1, 2011 with an exemption amount of $1 million per individual and a top tax rate of 55%.  Most folks assume, however, that the estate tax will be reintroduced in some form before then, with different exemption amounts and rates.

President Obama released his budget earlier this week and, no surprise here, he seeks to reinstate the estate tax at 2009 levels.  This would mean individual exemption amounts of $3.5 million and a top rate of 45%.  Yesterday, CNN reported that the Senate is considering a different, and more generous proposal, which would grant exemption amounts of $5 million per individual and a top rate of 35%.  Both Treasury Secretary Timothy Geithner and Senate Finance Committee Chairman Max Baucus indicated yesterday that they support making the estate tax, in whatever form it finally materializes, retroactive to January 1, 2010. (thanks to TaxProf Blog for linking to the Geithner and Baucus statements).  We will keep you updated as the debate continues.

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No Net Receipts Tax

A while back, we wrote about Governor Carcieri’s decision to float the idea of a net receipts tax as a “game changer” for Rhode Island’s current tax system.  Essentially, the plan would have imposed a 2% tax on all businesses’ net receipts.  The income theoretically would have been able to replace the corporate and personal income taxes.

The Providence Journal reported today that the governor has abandoned the idea.  Speaking on Buddy Cianci’s radio show this afternoon (we’re relying on the Projo report here; we didn’t catch the radio interview), Carcieri said “It’s just too complicated right now.”  While we don’t really know enough about the tax’s proposed structure to have an opinion whether or not it’s a good idea, we certainly were encouraged to think that the administration was searching for alternative ways to raise revenue.  And today we’re equally discouraged that after only two months – with no public debate of the plan that we’re aware of – it’s dead.

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In today’s New York Times, the Gray Lady herself published an article called “A Bizarre Year for the Estate Tax Will Require Extra Planning.” In it, the author discusses what we’ve written about previously – that the estate tax is currently dead but certainly not buried (we also wrote about it here and here).  Not to rehash our prior posts, but the current estate tax is gone, Congress intends to re-enact it – in some form – and probably will make the new legislation retroactive to January 1, 2010.

An interesting thread in the piece, that we haven’t written about, is the interplay between the estate tax and the capital gains tax.  Previously, the estate tax scheme valued property at the time of he owner’s death and did not calculate any gain on the value of an asset.  But, with the estate tax out of commission, the capital gains tax steps in to fill the void.  So, let’s say someone bought a house in 1975 and died this week, leaving the house to two children.  If the children sell the house, they will be responsible for paying tax on the appreciation in the house’s value from 1975 to 2010.  Ouch (there is an emergency IRS ruling that grants a small capital gains exemption on some property, and a larger exemption for surviving spouses, which should ease some of the pain).  And that, sadly, is the easy part.  Assume that instead of a house, that same person spent $10,000 in 1975 on stocks.  What price per share did s/he pay (unlike houses, there are no public records of every stock share transaction)?  Have the shares split?  Was the company bought?  Does the broker who sold the stock still exist?  Headaches galore…

Not only will the capital gains tax affect some heirs significantly, it will affect many more heirs than the estate tax would have.  Early estimates assume that about 70,000 people will be hit by the new capital gains tax requirements.  About 5,500 would have been affected by the estate tax at 2009 rate and exemption levels.  Are you one of those people?  As the articles goes on to say, the best way to figure out what this all means is to sit down with your financial advisor and estate planning attorney and make sure that your estate plan still fulfills your needs.  We couldn’t have said it any better ourselves.

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Happy New Year!  January is an opportunity to turn the page and start fresh (and after the difficulties of last year, we’re approaching 2010 with some relief).  But, before businesses can press forward into the new year, they need to take care of some of last year’s housekeeping details, and very few are more important than their tax reporting requirements.

One of the most important reporting requirements is the preparation of workers’ wage reports.  This can be done by completing Form W-2 for employees or by completing Form 1099 for independent contractors (the IRS website contains instructions and forms for completing both the W-2 and the 1099).  We’ll cover the distinction between employees and independent contractors in a future post.  For now, if a business is unsure whether to treat a worker as an employee or independent contractor, it should contact an attorney for assistance.

Ordinarily, businesses must provide W-2 forms to employees no later than January 31.  But, since January 31, 2010 is a Sunday, the IRS has generously given an additional day – this year they are due by February 1.  Businesses also must file copies of W-2 forms with the government no later than March 1, 2010, although you can get an extension of time if you file Form 8809.  The due dates are later if the business files its forms electronically.  If a business doesn’t file its W-2 forms in time, files them with the wrong information or doesn’t file at all, it is subject to penalties for every mistaken W-2 form.  The penalties range from $15 per mistaken W-2 at the low end up to at least $100 and, quite possibly more, for an intentional disregard of the filing requirement.

The requirements for Form 1099 are largely the same.  Businesses must provide 1099 forms to contractors no later than February 1, 2010 and to the government by March 1, 2010.  Extensions likewise are available by filing Form 8809 and the due dates are extended for electronic filing.  The penalties for mistaken filings are the same.

We encourage small businesses to work closely with their attorneys and/or accountants to ensure all these documents are properly prepared and filed.

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As we earlier wrote about here and here, Congress has been trying to figure out what to do about the estate tax.  It is set to expire on December 31, 2009.  It will be gone for a year and then return on January 1, 2010 at the same rates in existence ten years ago – during the last decade the rates have been declining and the exemption amounts have been increasing.  We were under the impression Congress would make a deal to patch the hole, but it doesn’t seem like it’s going to happen before the end of the year (this despite pressure from a New York Times editorial yesterday).

A report in today’s USA Today says that the House and Senate intend to patch the hole, sometime in 2010, but nothing is set in stone.  Lawmakers are considering making the tax retroactive, meaning an individual who dies on January 2, 2010 would be required to pay a tax enacted by Congress later in the year, a controversial (and, possibly, unconstitutional) result.

Leaving aside the issue of how legislators will craft a deal, the real problem (from our perspective) is the inability to plan under the current scheme.  As the USA Today article noted, the situation has devolved into “a guessing game for taxpayers, accountants, estate planners and tax lawyers.”  While we won’t offer our opinion on what we think the tax should look like, it is simply unacceptable that we don’t know what it will look like.

As an aside, the crush of the season has left us with less time than we’d like to post updates over the last few weeks.  We’ll be getting back up to speed over the next week.  We hope everyone has a great holiday season and a safe and happy new year.

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