The Internal Revenue Service defines the depreciable life of a building as 27.5 to 39 years. But that doesn’t mean that all assets grouped with the building have to be on the same depreciation schedule.

A cost segregation study can identify personal property assets that can be reclassified to allow for a shorter depreciable life.

“By accelerating depreciation deductions, you’re deferring taxes, which creates a cash flow benefit.” says Robert W. Haggerty, CPA, Partner, Tax Services at Brown Smith Wallace.

Smart Business spoke with Haggerty about what assets might qualify and the potential benefit to businesses.

How does a cost segregation study work?

Typically, blueprints or architectural drawings are used to identify what went into the building. Engineers analyze the drawings and perform site visits to identify qualifying property. Information from the general contractor or estimating manuals is used to determine the cost. A tax analysis is performed, which involves reviewing court cases and rulings that address which particular assets qualify for a shorter life.

Cost segregation studies can be performed anytime you build, acquire or expand. If the cost is $1 million or more, it is worth looking at.

The IRS also allows you to do a ‘catch-up adjustment.’ For example, if you bought or built a building five years ago and didn’t do a cost segregation study, you could still do one today and take the benefit on your current tax return.

With certain income tax rates rising, it’s a nice time to consider a catch-up adjustment.

What types of assets typically qualify for shorter depreciation?

Generally, property that is unique to a particular trade or business qualifies for a shorter life. An example I often use is the lights used to showcase merchandise in a retail store. Those lights are considered five-year property even though, by definition, lighting is part of the building. Not only do the light fixtures qualify, but so does the wiring and the portion of the electrical system supporting the fixtures.

Manufacturing facilities benefit the most from cost segregation studies because they typically have a lot of specialty systems or design inherent in the building that function as part of the manufacturing process. A large portion of the plumbing, electrical and HVAC systems qualify for a shorter life. Even the concrete floors can qualify. Hospitals and medical facilities are another industry with big benefits from cost segregation. Think about all of the specialty systems in a medical setting.

What are the tax benefits?

The benefit is the deferral of income taxes by accelerating depreciation expense. Moving costs from a 39 year building life to a five or seven year life can significantly increase depreciation expense for the building. Cost segregation studies can provide a permanent, time-value-of-money benefit of 10 to 50 times the cost of the study, which typically runs $5,000 to $10,000. Studies for larger projects can be much more costly, but the benefit usually increases with the cost of the project.

Any new developments of interest to businesses?

Yes, businesses can also take advantage of new final ‘Repair Regulations’ and proposed ‘Partial Disposition Regulations,’ which were issued in September 2013.

Under the old rules, you could not retire a portion of a building, so taxpayers who had a roof replaced, for example, could have two layers of roofs depreciating on their books. The new rules allow you to write-off the old roof.

In situations where it may be difficult to quantify the portion of the building that relates to the old roof — there might be only one asset on the books called ‘building’ — we are helping clients quantify the amount of the partial disposition.

Windows, interior build-outs and elevator replacements are other examples of items that may be eligible for partial disposition.

The Repair Regulations offer some safe harbors for small businesses and include de minimis rules that can apply to all taxpayers. So, there are even opportunities for businesses to take some tax deductions with very little effort. ●


Robert W. Haggerty, CPA, CGMA, is a partner in Tax Services at Brown Smith Wallace. Reach him at (314) 983-1311 or rhaggerty@bswllc.com.

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Published in St. Louis

Computing personal property taxes can be a chore for businesses, particularly if the company’s locations cross various state and local jurisdiction boundary lines. Each state has its own statutes, due dates, assessment ratios and instructions that must be adhered to for a company to be considered “compliant.” These property tax requirements vary greatly and most often have late penalties for missing deadlines. However, digging into these very statutes and instructions can also provide an opportunity to minimize your company’s tax burden.

“Many will run the fixed asset ledger right out of the system and that’s what they’ll report,” says Jenna R. Kerwood, CMI, a principal in Tax Services at Brown Smith Wallace.

However, that usually results in paying more taxes than what is owed because not all assets are taxable. Often, fixed assets are capitalized at a project level, which results in inaccurate reporting for property tax purposes. There may be costs that are not taxable or components of the cost that should be removed. The taxability of these assets can be determined by examining the state and county websites, statutes, assessor manuals and return instructions.

Smart Business spoke to Kerwood about what constitutes personal property and why it’s worth the effort to keep an accurate track of assets.

What is the difference between real estate and personal property?

Real estate refers to land and buildings. Personal property is defined as tangible property that’s movable. It can be difficult to distinguish between the two, especially with manufacturing facilities, and each state has different rules and instructions.

Most states have a three-prong test:

 

 

  • Can the item be moved without destroying the real estate?

 

 

 

 

  • What is the primary purpose the item serves? The more special its use, the more likely that it will be considered personal property.

 

 

 

 

  • What was the owner’s intent?

 

 

The key is whether it would destroy or cause permanent damage to the building if you were to remove the item.

What is the basis of property tax assessments?

The basis of value for real estate and personal property is fair market value — the amount a willing buyer would pay in a market when there’s no duress, such as a bankruptcy or foreclosure. Fair market value is subjective, which gives you an opportunity to analyze all of the capitalized cost to determine how best to reflect the ‘fair market value’ of the asset.

When reporting assets for property tax purposes, you need to understand their physical life, use, maintenance schedules, etc., in order to depreciate correctly. Items with a short life have faster depreciation. Manufacturing equipment might have computerized components that can be placed on a shorter life with a more reasonable depreciation schedule.

How can businesses lower their tax burden?

Start with fixed asset accounting records. When filing personal property tax returns, you report the original cost of the asset by year of acquisition. Companies might have a retirement policy by which they dispose of, melt down or cannibalize an asset, but that’s not reflected on the books.

It’s best to address problems on the front end. Review the asset ledger for listings that don’t look right — focus on the high dollar items or assets with ‘miscellaneous’ as the description. Scrutinize asset invoices and review them with the people who know them; it might be the plant manager for the manufacturing facility, facilities person for the furniture and IT people for the computer asset listing. Another area to consider is depreciation. The county will tell you the rate, but that may not be accurate and is negotiable.

How much can be saved?

Conservatively, businesses can lower personal property taxes by 20 percent. Most state rates are at 2 percent. When you tell a company that cleaning up asset lists can save $30,000 or more, it gets their attention.

Jenna R. Kerwood, CMI, is a principal, Tax Services, at Brown Smith Wallace. Reach her at (314) 983-1360 or jkerwood@bswllc.com.

For more on this and other tax topics, visit Brown Smith Wallace's Tax Insights.

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Published in St. Louis

Recovering from a flood or fire is hard for a business. But dealing with problems caused by a lack of business continuity plans or inadequate insurance can make it worse.

“The better you can plan for how to deal with an incident, the better off you’ll be,” says Lawrence J. Newell, CISA, CBRM, QSA, CBRM, manager of Risk Advisory Services at Brown Smith Wallace. “I say ‘incident’ because it could be something not always thought about in typical disaster terms, such as a breach of credit card information.”

Smart Business spoke with Newell and William M. Goddard, CPCU, a principal in the firm’s Insurance Advisory Services, about developing business recovery plans and the insurance options available to reduce risk.

What goes into a business continuity/recovery plan?

One component is a business impact analysis, placing a value on what the business needs to operate. Layered underneath are the business processes, which include the business continuity plan and its identifying process flows. For example, length of shutdown is part of the business continuity plan, which contains timelines.

Then there is the disaster recovery plan, which covers anything the business depends on that is IT related. Information has more value than just the data because of the intelligence built around it. So you need to identify where that data is processed, stored or transmitted.

There is also a communication plan, making sure an incident is communicated upward, downward and outward — upward to the executive management team, downward to the enterprise and outward to customers and business affiliates. Part of the communication plan is identifying the impact, whether it’s a simple outage or a more widespread incident such as a tornado, flood or hurricane.

What options are available to manage risk?

In the example of a credit card breach, there are risk reduction processes such as applying security standards developed by the credit card industry. There’s also cyber risk insurance, which insures costs to locate the problem, including hiring experts to do that, notification of cardholders, and business interruption loss.

What do businesses need to know about disaster coverage in insurance policies?

Generally, what we think of as disasters — earthquakes, hurricanes — are covered under property insurance. But business insurance policies also contain sublimits. For instance, you can have $100 million insurance coverage, but the sublimit might be $25 million for a flood. Policies carry different sublimits, and a company planning to use insurance to cover these disasters needs to be aware of them.

What is co-insurance, and how does that impact claim payments?

After a loss, the insurance company will judge the value of a building, say it’s $1 million. A co-insurance clause is typically 90 percent, meaning that the building should be insured to 90 percent of its value — so you’ve bought $900,000 insurance coverage on a $1 million building. If it burned to the ground, you would be paid $900,000. But if you only bought $800,000 insurance coverage and were supposed to buy $900,000, all recovery is based on having 88.8 percent of the coverage you should have. If a small warehouse fire causes $100,000 in damages, you wouldn’t be paid $100,000, but $88,800. This concept of co-insurance is frequently in policies and can be punitive for loss recovery.

How can insurance costs be reduced?

Insurance companies will inspect your property and following their recommendations can make you a better risk, reducing premiums. It’s also important to figure out exactly what coverage you need — it’s best to get an independent adviser. There have been many court cases involving inadequate insurance; they’re expensive to bring and hard to win. It’s better to get it right when you buy the policy, so you should have someone other than the person who’s selling you the insurance answer your questions and conduct an analysis of your needs.

William M. Goddard, CPCU, is a principal, Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or bgoddard@bswllc.com.

Lawrence J. Newell, CISA, CISM, QSA, CBRM, manager, Risk Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1218 or lnewell@bswllc.com.

We can help you prepare for disasters and get better insurance coverage. Learn more.

 

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Data breaches are becoming more commonplace, causing millions of dollars in damages for companies that have personally identifiable information (PII) hacked by cybercriminals.

“Think about all of the losses you can incur. Not only do you have to hire a security expert to find what happened, you may be assessed fines or penalties by the merchant’s acquiring bank or payment card brand. In addition, you could be responsible for credit card charges made by the criminals and lose business because no one trusts you anymore,” says William M. Goddard, CPCU, principal, Insurance Advisory Services at Brown Smith Wallace.

Smart Business spoke with Goddard and Lawrence J. Newell, CISA, CISM, QSA, CBRM, security and privacy manager, about protecting companies from cybercrime.

How do cybercriminals access networks?  

One typical method is spear phishing. Unlike traditional phishing attempts, which are fraudulent emails sent at random claiming to be from a reputable organization like a bank or eBay, spear phishing emails are sent to targeted employees or customers of a company.

The email appears to be coming from the company and requests that the recipient click on a link, which then goes to a fraudulent website. They may ask for personal information or they may launch a virus they’ll use to get into your network.

If you click on the link, it launches a program in the background that goes onto your workstation and canvasses the network for other vulnerabilities. The program collects data, whether that’s credit card information or other PII, and uploads it to the cybercriminal.

How can you reduce cyberattack risk?

The first thing to do is develop an information security policy, document it and disseminate it throughout the organization.

Other protective measures are:

  • Conduct an inventory of authorized devices on your network. Guests can come into your place of business with a laptop and leave a device on your network that goes undetected. That device could have Trojan horses or viruses that, when executed, plant a program on your network.
  • List an inventory of software allowed to run on workstations or servers. That helps when looking for rogue programs or software installations.
  • Install an anti-virus program to detect malware. Anti-virus protection also needs to be maintained and updated for the latest definitions.
  • Run vulnerability and penetration tests on servers and networking equipment to make sure you don’t have unnecessary services running that could lead to a vulnerability and potential unauthorized access.
  • Prevent data loss by running programs to detect outbound calls or connectivity to remote sites that are not authorized to receive data output.
  • Create security awareness within your company to ensure that people who have access to information are not sharing anything that is confidential or private.
  • Develop an incident response plan to react to a breach and quarantine activity before it spreads throughout the network.

Companies think they’re protected because they are compliant with some standard such as PCI, but that’s no guarantee their systems will not be compromised. Your security program needs to go beyond PCI and focus on more than credit card information. Cybercriminals go after the easiest target along with whatever PII is available that has value. For instance, not-for-profit organizations may have names, addresses and checks with banking information; all of that information is valuable to somebody. For similar reasons, credit cards are often targeted because they’re so widespread and it’s the easiest information to sell.

What can companies do to protect against losses if they are hacked?

A variety of insurance policies cover things like the cost of fines, notification that PII has been compromised, liability and business interruption. All cyber policies are slightly different, and you have to be careful to buy the right coverage.

Businesses are smart enough to buy fire insurance in case a building burns down. Cyberattacks can be just as damaging, depending upon what happens and what information has been compromised.

William M. Goddard, CPCU, is principal, Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or bgoddard@bswllc.com.

Lawrence J. Newell, CISA, CISM, QSA, CBRM, is manager, Risk Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1218 or lnewell@bswllc.com.

Brown Smith Wallace can help you with cybersecurity. Visit them here to learn more.

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Companies are being challenged to protect vast amounts of proprietary and confidential information. And now, many are being held to an even higher standard when it comes to protected health information (PHI).

“The Health Insurance Portability and Accountability Act (HIPAA) has existed since 1996. It’s well established that covered entities — health care providers, benefit plans and clearinghouses — have a responsibility to ensure the privacy and security of PHI. Recently, the rules have been tightened to also cover business associates — organizations with which a covered entity shares PHI. These changes mean that business associates now have to fully comply and be accountable under the HIPAA security rule,” says Tony Munns, member, Risk Advisory Services, at Brown Smith Wallace.

Smart Business spoke with Munns about the final omnibus rule and what actions businesses should take.

What prompted the new rule?

A significant number of data breaches were from business associates who were not as diligent as they should have been, and covered entities were not selecting business associates with the appropriate rigor. A notable example involved an insurance company that had a business associate who was responsible for off-site storage of sensitive data. The business associate was using a garage, which was left unlocked and wasn’t climate-controlled. That contracting choice has led to separate investigations by both California and federal regulators.

What action should companies be taking?

The Department of Health and Human Services said that it’s not sufficient to just have an agreement, there needs to be satisfactory assurance that the business associate can and does follow proper procedure. Entities covered by HIPAA have until Sept. 23, 2013, to update their business associate agreements. Current agreements do not have to be changed until they’re up for renewal, but in any case all agreements have to be updated by Sept. 22, 2014.

What steps should companies take to comply with the legislation?

  • Understand the new requirements and the impact on the business.

  • Update business associate agreements.

  • Apply the satisfactory assurance mandate.

Review existing agreements and perform due diligence to get comfortable with the practices of your business associates. This might involve requesting that audits be performed, such as Statement on Standards for Attestation Engagements No. 16 reports. In the insurance company example, no one examined whether the person contracted to provide off-site storage was capable of providing it to the level expected.

What are other requirements of the final omnibus rule?

The new rule requires that individuals be informed that their information has been breached. Managing breaches is no longer sufficient. Meanwhile, business associates are not required to provide a notice of privacy practices or designate a privacy official; they only need to comply with the general privacy requirements and all security measures, much like covered entities.

The definition of a breach was also changed from ‘a significant risk of financial, reputational or other harm to an individual’ to ‘an acquisition, use or disclosure of PHI in a manner not permitted.’ Under the old rule, companies that didn’t believe information was compromised didn’t need to classify it as a breach. Now they have to report the breach, but can apply mitigation to demonstrate there was a low probability of harm.

What are the penalties?

There are four categories:

  • Ordinary breaches, such as an error or lost equipment — $100 to $50,000 per violation.

  • If reasonable due diligence would have revealed the violation — $1,000 to $50,000 per violation.

  • Conscious, intentional failure or reckless indifference, but the breach was corrected — $10,000 to $50,000 per violation.

  • Conscious, intentional failure or reckless indifference and the breach was not corrected — $50,000 per violation.

For all violations, the cap is $1.5 million. And there will be more enforcement.

Tony Munns is a member, Risk Advisory Services at Brown Smith Wallace. Reach him at (314) 983-1297 or amunns@bswllc.com.

 

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The financial impact of the Patient Protection and Affordable Care Act (PPACA) may seem to be its  most challenging aspect. Mitigating that impact may seem like the most practical solution. However, Ron Present, health care industry group leader at Brown Smith Wallace, says, “There are a lot of strategic implications to what you do and how you do it. Management should avoid just calculating the math and saying, ‘This saves us money so it’s what we’re doing.’”

To that point, Bill Goddard, principal, insurance consulting at Brown Smith Wallace, says, “You should consider many potential solutions before making a decision that could drastically diminish your ability to retain and acquire talent, and keep your workforce engaged.”

Smart Business spoke with Present and Goddard about dealing with health care insurance after the PPACA from a cost and strategic perspective.

How has the PPACA affected private insurance?

Starting Jan. 1, 2014, employers with 50 or more full time or full-time equivalent employees, considered large employers, must offer health insurance that fits certain affordability and coverage criteria or face a penalty. This could have an immediate impact on an employer’s cost to provide health insurance because a group of employees that had not had insurance may enroll in the plan and because of pre-existing conditions or high use of care, will cost the employer a significant amount of money.

Also, the health care law changes the status of some who had been considered part timers for insurance purposes to full-time employees. In some industries, many employees have not historically taken health insurance, sometimes as much as 66 percent of a company’s workforce. These employees will need to be offered coverage, potentially tripling costs.

How might that impact employers?

Companies are calculating their potential risk to cost. However, that’s only one aspect. The other is the strategic impact.

Some companies have considered limiting their variable hour, or part time, employees, to less than 30 hours per week to reduce the number of employees considered full time. To maintain an adequate workforce, such changes can require hiring additional employees, or changing existing employees’ workloads and job descriptions to keep up production and prepare for 2014.

Should employers not provide coverage?

Let’s say a large employer decides not to offer health insurance and instead pay the $2,000 per employee (minus 30) penalty, which may seem cheaper. However, the law requires individuals to have insurance regardless of employer coverage, so employees may leave for a competitor that provides it. Those who stay out of necessity may always be looking for another employer that provides coverage, lessening their productivity and loyalty while raising turnover, which is a significant expense.

Counsel employees. Let them know that they can refuse insurance coverage from the employer and either purchase insurance through a public exchange/marketplace or instead pay an annual penalty. Employees may prefer to pay the penalty instead of paying far more each month for coverage.

How can employers that provide insurance cope with rising premiums?

Large employers offering health insurance to a population of purely full-time employees can potentially control premium costs by forming a captive insurance company. This is an insurance company that non-insurance companies with 50 or more full-time employees can start. It is generally owned by the company that forms it and insures a limited population, typically just its own employees.

Another potential solution is to form a private exchange, which may be complementary to forming a captive insurance company, in that the entity forming it creates its own marketplace, which means it may qualify as providing insurance with a defined contribution that may help control costs.

Bill Goddard is a principal, insurance consulting, at Brown Smith Wallace. Reach him at (314) 983-1253 or bgoddard@bswllc.com.

Ron Present is a health care industry group leader at Brown Smith Wallace. Reach him at (314) 406-5105 or rpresent@bswllc.com.

 

WEBSITE: For more on this topic, visit http://bswllc.com/industries/health-care.

 

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Taxpayers, investors and the stock market anxiously awaited the changes promised in the American Taxpayer Relief Act of 2012 (the Act) only to find that most passed provisions in the Act generally create more questions and concerns for the 2013 tax year and beyond.

To help unravel the changes made to the current tax laws that impact business owners, Smart Business spoke with Cathy Goldsticker and Robin Bell, tax partners at Brown Smith Wallace LLC. They outlined the Act’s relevant changes and the ways business owners can take advantage of many of its provisions and identify areas for tax planning opportunities.

What effect did the extension of many tax provisions have on business tax?

One key business provision is the ‘Section 179’ expensing election for first year tax write-offs of furniture and equipment, which has been retroactively increased to what it had been in 2011. For 2012, there is a $500,000 immediate write-off available on up to a $2 million investment in equipment and furniture. Without this change, it would have been $139,000.

This means, if you bought more than $2 million in qualifying business assets, you would lose the ability to write off the $500,000 in year one. Conversely, if you bought qualifying assets in 2012 that totaled less than $2 million, you can write off $500,000 in 2012 immediately and depreciate the remaining purchase price over the prescribed IRS life.

The change ultimately results in added choices for business owners because, for some businesses, writing off $500,000 in 2012 is not such a good idea. For an S Corp. or a partnership, for example, it may be better to take the write-off over several years because the rates for higher-income individuals, which will be a marginal rate of 39.6 percent instead of 35 percent, makes waiting generally the better option. However, if you have a high income this year, but next year, you anticipate it will be lower, it might make more sense to take it in 2012.

On the other side, since the tax rates of C Corps. remain at 35 percent and it’s unclear whether rates will change, it would probably behoove that type of company to take the immediate expensing.

Additionally, the 50 percent bonus depreciation for the purchase of new business assets was retroactively reinstated to the beginning of 2012. But faster depreciation might not be the best choice if you expect a bigger benefit from a future deduction, similar to the Section 179 consideration. Also, the research and development credit was made retroactively available for 2012.

Were any permanent tax law changes made?

The one permanent tax law change that receives attention year after year relates to the alternative minimum tax and is referred to as ‘the AMT patch.’ It’s mostly applicable to middle-income and lower earners and has become permanent at $78,750 (married amount), with annual inflation adjustments. AMT affects business owners because many operate as S Corps. and partnerships, which means the tax is paid by the owner(s), not the business.

Another permanent tax law change is the estate and gift tax exclusion that’s now $5.12 million. It was widely believed that after 2012, the exclusion would decrease significantly by reverting back to the pre-2001 tax law amount. When it was believed it would expire, many undertook gifting and other estate planning measures before the end of 2012. Freezing it at the higher level enables many more people to take advantage of this provision.

What are the tax benefits for C Corps. that elect to become S Corps.?

There was a reduction in the S Corp. recognition period for built-in gains tax. If you’re currently a C Corp., you can make an election to be treated as an S Corp. for income tax purposes. When you make the election, you may have a double tax (built in gain tax) on certain asset dispositions during a 10-year period. Historically, the rule has been that from the day of conversion for 10 years, certain assets sold had additional income tax due on the difference between your basis in them at that time and their fair-market value. The 10-year period became five years for 2011 and that will continue for 2012 and 2013 under the Act. This provision is making it easier to avoid double taxation on certain assets or selling your business, but it’s also accelerating some collection by the IRS because in the first year there may be revenue to collect on certain transactions.

There are many reasons to change from a C Corp. to an S Corp., but the driver of avoiding double taxation could be part of a sound tax strategy. The Tax Act has raised the individual tax bracket up to 39.6 percent for higher-income taxpayers, so it’s possible a C Corp. structure, which utilizes a 35 percent maximum tax rate, is better.

Another permanent tax law change is the estate and gift tax exclusion that’s now $5.12 million. It was widely believed that after 2012, the exclusion would decrease significantly by reverting back to the pre-2001 tax law amount. When it was believed it would expire, many undertook gifting and other estate planning measures before the end of 2012. Freezing it at the higher level enables many more people to take advantage of this provision.

How were individual tax laws affected?

Although tax rates for lower-income taxpayers remain the same, higher income ($450,000 or higher) will now have a marginal tax rate of 39.6 percent (married taxpayers). Also, the capital gains and dividends tax rate is now 20 percent for higher-income taxpayers instead of 15 percent. These are just the basic income tax rates stemming from the 2012 Tax Act, but there is also a 3.8 percent Medicare tax coming with the implementation of health care reform on much of the same income. Another Tax Act provision reduces the tax benefits of personal exemptions and itemized deductions. Individual taxpayers are going to lose some itemized deductions and some or all of their personal exemption deductions as their income grows (phase-outs). This was the case when the Bush tax laws were in effect a few years back and didn’t get changed, modified or removed with the 2012 Tax Act. For the 2010 and 2011 tax years, these itemized deductions and personal exemption phase-outs disappeared. Because Congress didn’t do anything permanent to change the law, the phase-outs are in effect again, so the tax benefits for these two items are reduced.

What changes were made to estate and gift taxes?

The tax rate increased from 35 percent to 40 percent on taxable estates or deceased individuals with assets in excess of $5.12 million, indexed for inflation.

If you haven’t given away roughly $5 million from your estate in 2012, you have another chance because the larger exclusion remains in the law.

Another important aspect of the estate and gift tax is the portability feature of the exclusion. Historically, one person was entitled to an exclusion when they died. The Act made permanent a provision that allows one spouse to pass their unused estate exemption to their living spouse, doubling the amount the surviving spouse can gift during their lifetime without incurring a tax.

There are effects on this portability provision should the surviving spouse remarry, so make sure tax advice is obtained.

Which energy credits and provisions were extended?

Many credits for energy-efficient home improvements, appliances, new construction, two- and three-wheeled plug-in electric vehicles and alternative fuel sources were extended. However, while the credits have been preserved, there are still limitations on the applicability and amounts of the credits.

From a general perspective, the energy incentives should be here to stay and more should be in the pipeline. Those who are interested in understanding them should do a careful cost/benefit analysis on your purchase or construction.

That’s not to minimize the environmental impact of these purchases, but sometimes it is very expensive to try to be energy-efficient. And sometimes, the benefit from the credit perspective side does not offset the cost of trying to be green.

Ultimately, if you’re inclined to be green, that’s wonderful, but proceed with caution because the tax benefit may not outweigh the costs.

Cathy Goldsticker, CPA, is a partner, Tax Services at Brown Smith Wallace LLC. Reach her at (314) 983-1274 or cgoldsticker@bswllc.com.

Robin Bell, CPA, is a partner, Tax Services at Brown Smith Wallace LLC. Reach her at (314) 983-1217 or rbell@bswllc.com.

Published in National

Now that the 2012 presidential election is in the history books, a lot of attention has befallen the health care industry, particularly in terms of “health care exchanges” due for implementation under President Barack Obama’s health care reform beginning Jan. 1, 2014.

Ron Present, principal of health care advisory services at Brown Smith Wallace in St. Louis, Mo., says, “On a broad level, these health care exchanges are like an Amazon.com for insurers to offer their services. But there are implications for employers that can be far-reaching.”

He says while these exchanges can offer certain employers a way to unload the burden of providing health insurance to employees, business owners should carefully consider the implications — in terms of strategy, cost, and talent acquisition and retention — such a move could have.

Smart Business spoke with Present about health care exchanges, what they are and how they might impact health insurance options for employees.

What are health care exchanges?

On the broadest level, they’re a marketplace that offers health care coverage options for a given geographic area. It’s an access listing point for insurance companies to identify what costs and benefits would be available for customers in one collected area. These portals will look different depending on whether it is a federal- or state-created exchange, and the options within would, of course, differ accordingly.

When someone goes on the exchange, that person would be presented with a multitude of options through carriers like Aetna and United Healthcare, and those selections would be made by a user based on demographic data, type of coverage and so on. The exchange calculates costs, eligibility, payment options and such, allowing potential buyers to decide what’s best for them. Then it’s up to the buyers to decide what suits them best.

What’s really interesting in light of the election is that a lot of states are talking about not complying with this provision of health care reform. Exchanges are supposed to be in place by Jan. 1, 2014, and notifications of intent to the federal government by the states were supposed to be completed by Nov. 16, 2012. However, U.S. Department of Health and Human Services Secretary Kathleen Sebelius recently has extended the deadline to Dec. 14. The problem is, if states don’t have a state health care exchange set up, they’ll have to revert to the exchange that’s set up on the federal level, with more federal involvement. It’s an interesting irony for those resistant states.

How can health care exchanges benefit businesses from an accounting perspective?

Exchanges are currently geared to individuals and small businesses, with the definition of the latter differing by state guidelines. The most common definition of small business is one with fewer than 100 employees; those entities may be able to use an exchange to purchase insurance for group employees, which in theory opens them up to a better deal. The buying power of a large group is good for smaller employers and helps keep their overall costs down — think standards and levels of cost.

The other theory is, that in going to these exchanges, so many people will be buying insurance that the insurance competitors with similar benefits will make things interesting. It’s anticipated that by 2016, or perhaps 2017, this model may open up for larger employers, as well.

How did the election results change the way health care exchanges are viewed?

The big impact of the election is that health care reform is here to stay, so many individuals and companies who took the wait-and-see approach are now scrambling. Some 42 percent of health care providers hadn’t really done much at all about it leading up to the election, according to a recent survey by Modern Healthcare.

Are there tax advantages to health care exchanges?

It’s difficult to discern, but the penalties and the taxes aren’t really related to the exchange itself so much as they are to the actual health care reform. If we’re focusing specifically on the exchange, you could say that if certain employers opt to cut all health insurance, they might decide that it is cheaper to leave employees to find their own health insurance. It leaves them open to a bit of a double whammy though. The employer would have to pay a penalty for noncompliance, and it would no longer have the deductible from the insurance side.

How can business owners prepare for changes in health care exchanges?

Work with your accountant to do a complete financial analysis of your business. A lot of the issues in health care reform are more strategic than financial. The real challenge is looking at the ‘What if I don’t offer insurance?’ model, because the financial implications are mostly related to not doing it.

The jury’s still out on how it will all play out. But even those situations aren’t just a black-and-white number-crunching approach. It’s looking at what your competitors are doing. You might ultimately be saving money by not offering health care, but if you’re unwittingly losing your best employees to a competitor, where is the savings? Maybe you’re paying the price another way without really counting the cost.

Ron Present is principal, health care advisory services, at Brown Smith Wallace in St. Louis, Mo. Reach him at (314) 983-1358 or rpresent@bswllc.com.

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Published in National

Tax planning is especially complex this year given the turbulent political environment and a litany of tax laws due to expire at the end of 2012. From bonus depreciation to capital gains tax rates, if Congress fails to act and these provisions and others are allowed to expire, taxpayers could carry a significantly heavier financial burden in 2013.

“We know that tax laws are going to change, but we’re just not sure how,” says Cathy Goldsticker, CPA, member, tax services, at Brown Smith Wallace, St. Louis, Mo.

This year, more than ever, it is critical that businesses/business owners consult with their tax advisers as early as possible to discuss the what-ifs so they are prepared in December when we have a better idea of what 2013 tax law will bring, she says.

“All you can do with this level of uncertainty is plan, plan, plan,” says Robin Bell, CPA, member, tax services, at Brown Smith Wallace. Businesses and individuals should have several options depending on the outcome of the election.

Smart Business spoke with Goldsticker and Bell about tax provisions due to expire in 2012, and how business owners can best prepare and be flexible in light of the uncertain tax environment.

What measures can business owners take given tax law uncertainty?

Businesses that have not yet met their Section 179 threshold 2012 of $560,000 can invest in qualifying equipment and furniture so they can take the full write-off this year. Until the calendar year turns, the bonus depreciation of 50 percent still applies, and we’re not sure what will happen to this tax advantage next year.

Along the same lines, consider taking advantage of the current 15-year depreciation rate on qualified leasehold improvements, which fall into the three categories of commercial, retail and restaurant. This could roll back to the traditional 39-year depreciation tax write-off if the provision is not extended for 2013.

What could happen to the current low capital gains and dividend tax rates that are due to expire in 2012?

If nothing is done to extend current tax rates into 2013, the existing lower capital gains rate will expire. The 15 percent extended tax rate bracket changes to a 20 percent tax rate. Dividend income reverts from a 15 percent tax rate to a taxpayer’s ordinary income tax rate, which could be as high as 39 percent.

For business planning purposes, it may make sense to pay out dividends, if your corporation has accumulated earnings and profits, before the end of the year so those are taxed at the current 15 percent rate.

A potential capital gains and dividend tax rate hike could drastically affect retirement and investment planning, as well. Individuals may want to reconsider their investment strategy in dividend-paying stocks and choose exempt or fixed-income bonds, depending on projected rates of return.

What is known for certain about the 2013 tax situation?

Tax rates will not decrease, but it is not known how much they may increase or if possibly they may stay the same. That depends on how tax legislation shakes out at the end of 2012 following the presidential election and the decisions that Congress makes before new legislation starts during the lame duck session or afterward.

What we do know for certain is that the Medicare surtax is current law as part of the Patient Protection and Affordable Care Act. This 3.8 percent tax on net investment income will be imposed starting with the 2013 tax year on the lesser of an individual’s net investment income for the tax year or the amount by which their modified gross income exceeds the threshold amount that tax year — $250,000 for joint filers, $125,000 for married filing separate and $200,000 for all other filers. Essentially, this is a double tax that applies to individuals since this is a non-deductible tax.

Additionally, the 2 percent decrease to the Federal Insurance Contributions Act (FICA) rate that has been in effect for the past two years expires on Dec. 31, 2012, restoring the rate to 6.2 percent on wages and self-employment income. This will affect the take-home pay of all employees and owners.

For closely held businesses, it is important to consider salary management — look at payments and strategize the source of those payments in the most tax-efficient way.

Finally, the 3 percent ‘haircut’ for itemized deductions and personal exemptions is also set to expire in 2012. Bear in mind that itemized deductions and exemptions are phased out as income increases, so taxpayers will not get the benefits of all of their deductions as they have in the recent past. This calls for income management; if your income will increase in 2013, that may disallow some of your tax benefits and, theoretically, could put you in a higher tax bracket.

What additional tax provisions should individuals keep on the radar as they plan for 2012 and beyond?

For those taking advantage of the Refundable Alternative Minimum Tax (AMT) credit, this is set to expire in 2012. Also, the $1,000 child credit will revert to $500 if the provision is not extended.

Beyond these provisions, there is a laundry list of tax law changes that could occur in 2013 if there is no tax bill passed in 2012 or early 2013. We know there will be at least some change. To know what these changes will be, we need to see how the tax structure shakes out after the election and final congressional session of 2012. That said, the best way for business owners and their families to prepare is to plan carefully, including working out several tax scenarios. Then, wait to act until there is a clearer picture of 2013 tax legislation.

Last but not least, remember, there is an opportunity to transfer significant family wealth without incurring gift tax before the end of the year, and those opportunities might go away if the estate/gift tax structure is not extended.

Cathy Goldsticker, CPA, is a member, tax services, at Brown Smith Wallace LLC, St. Louis, MO. Reach her at cgoldsticker@bswllc.com or (314) 983-1274.

Robin Bell, CPA, is a member, tax services, at Brown Smith Wallace. Reach her at rbell@bswllc.com or (314) 983-1217.

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Published in St. Louis

Missouri is focused on attracting and retaining businesses by creating a positive economic environment.  One way the state has worked to enhance its economic position is by implementing tax laws that benefit the business community. For instance, during 2012, three bills were passed by the state legislature that expand current exemptions and deduction opportunities for businesses that meet certain criteria.

“Missouri is attempting to assist businesses during this time of economic recovery,” says Susan Nunez, the state and local tax principal in the Tax Services Group at Brown Smith Wallace LLC, St. Louis, Mo. “The state is looking for ways to enhance business and the passing of these tax laws demonstrates those efforts.”

As a result of the recently passed bills, purchasers now have a more direct avenue for obtaining refunds of overpaid taxes, more businesses may take advantage of expanded transportation asset exemptions, and partnerships and S corporations now can claim a job creation deduction that was previously only available to corporations.

Smart Business spoke with Nunez about the bills that were passed and what opportunities these tax laws may introduce for businesses.

How is Missouri streamlining the process for obtaining refunds for overpaid taxes?

House Bill 1504 (HB1504) creates an avenue for a purchaser to obtain overpaid sales and use tax directly from the Department of Revenue and sets forth steps on how to obtain refund claims. Prior to the passing of HB1504, if a purchaser realized that it overpaid taxes to a vendor, the purchaser was required to contact the vendor and request the vendor to file a refund claim with the Department of Revenue on behalf of the purchaser.  If a vendor was not willing to cooperate, the purchaser lacked authority to pursue a refund of the overpaid tax with the Department of Revenue directly and thus lost the opportunity to obtain the refund of taxes it erroneously paid.

Meanwhile, if the Department of Revenue sent a notice to the vendor in response to a purchaser’s request for a refund, that purchaser may have missed its opportunity to respond or appeal due to the lack of due diligence on the part of the vendor.  Overall, it was a struggle for purchasers to obtain refunds for taxes they paid to their suppliers. Additionally, vendors who did cooperate with their customers request to submit refunds potentially had an additional risk of being audited by the state.

With the passage of HB1504, the purchaser receives its refund from the state, not the vendor, so the process is more efficient and effective. A purchaser who has overpaid taxes must contact the vendor in writing requesting the vendor to assign its right to the refund. If the vendor agrees and signs the letter, the purchaser can file a refund claim directly with the state and include a copy of the letter. Once the claim is filed, reviewed, and approved by the Department of Revenue, the state will notify the vendor and, upon approval, will refund the overpaid tax directly to the purchaser.

Because the refund is paid directly from the Department of Revenue to the purchaser, the process is streamlined and can easily be audited. In addition, it relieves some of the vendor’s burden because it does not need to utilize its own resources to obtain such refunds.

How has Missouri expanded the exemption for transportation assets?

Historically, there have been transportation asset exemptions that applied to assets used for the transportation of persons or property for hire by common carriers.  Since the original exemptions were adopted, the U.S. Department of Transportation has changed the rules regarding common carriers, and many businesses have obtained and now operate their own fleets of qualifying assets. To allow more businesses to take advantage of the exemption, the new law enhanced the existing exemptions by the addition of a transportation asset exemption.

The new exemption applies to purchases or leases by all motor carriers that operate motor vehicles that have a licensed weight of 54,000 pounds or more. Additionally, this new exemption is a bright line exemption. If a business operates as a motor carrier, with a truck licensed for the requisite weight, the exemption requirements may be met.

How can partnerships and S corporations now take advantage of a job creation deduction?

When original legislation was passed providing a deduction from income tax for new jobs created in Missouri for certain qualifying small businesses, the language in that bill limited the tax opportunity to corporations. It did not apply to partnerships or S corporations because those are pass-through entities that do not pay income tax, as they are taxed at the owner level. Missouri recently passed a remedy to correct this oversight in the original law, which allows owners of partnerships and S corporations to pass the deduction through to their owners. This change is reflected in House Bill 1661, and it is great news for small businesses of all types that are creating jobs in the state.

What steps should a business take to determine eligibility for these tax advantages so it can reap the benefits?

First, business owners should present their fact patterns to their attorneys or accountants when discussing whether these opportunities will apply to them. Do they operate a fleet of trucks that transports goods? Are they currently claiming a transportation exemption? Are they creating jobs in the state?

A knowledgeable professional can provide guidance by reviewing a business’s operations, its tax posture, understanding the scope of the particular law and how these laws may affect the taxpayer’s everyday business.

Susan Nunez is a state and local tax principal in the Tax Services Group at Brown Smith Wallace LLC, St. Louis, Mo. Reach her at (314) 983-1215 or snunez@bswllc.com.

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Published in St. Louis
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