By Marcia Swihart Orgill
There is an increasingly wide divide between Democrats and Republicans on a multitude of issues. However, both parties agree that exports are a key to economic growth.
Last year, President Obama announced his goal to double U.S. exports by 2015, and Republican leaders indicated their desire to work with the President to expand trade to key allies. To encourage exports, the President issued a National Export Initiative that focuses on helping small to mid-sized U.S. businesses export their products and services.
The extension of the qualified dividend rates through 2012 also provides U.S. exporters with the opportunity to save taxes by establishing an Interest-Charge Domestic International Sales Corporation (IC-DISC).
Yet many export companies that could benefit from the tax savings of an IC-DISC fail to do so. According to some estimates, only about 6,000 businesses–a small portion of those that qualify—take advantage of the tax savings of an IC-DISC.
Capitalizing on these tax savings could give Missouri export companies a leg up on their competition. A key to increasing profitability is working smarter not just harder. Less taxes means more money that can be injected into the business to fuel growth and increase profitability.
Candidates for an IC-DISC
Privately held C-Corporations and pass through entities, such as S-Corporations, partnerships and LLCs, that could benefit from the tax savings of an IC-DISC include:
- Manufacturers and distributors of U.S. manufactured products with more than 50% U.S. content and a destination outside of the U.S.,
- Architectural and engineering firms with projects outside of the U.S.,
- Software developers of computer software that is licensed for reproduction outside of the U.S.,
- Agricultural and mineral producers that export products outside the United States, and
- Lessors of new or used U.S. made products to third parties for use outside of the U.S.
Continue reading »
09/22/11 2:10 PM
Business Law, International, Manufacturing and Distribution, Tax | Comments Off |
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The IC-DISC: An Underutilized Tax Savings Provision
By Misty A. Watson
The IRS has published guidelines for domestic partners in community property states and same-sex spouses in California.
Each year, many LGBT couples must complete two separate and completely different tax returns. For states recognizing same-sex marriage or allowing the registration of domestic partners, the couple may be able to file jointly for their state tax return. Then, due to the provisions of the federal Defense of Marriage Act, the couple must individually complete separate federal tax returns.
The IRS guidelines help with couples in which an individual may be eligible for head of household status and clarify that each member of the couple must file a separate tax return.
For more information, click here: “Questions and Answers for Registered Domestic Partners in Community Property States and Same-Sex Spouses in California.”
Posted by Attorney Misty A. Watson. Watson’s practice focus is estate-related: planning, administration, and probate. She creates trusts, wills, financial, and health care powers of attorney, guardianships, and conservatorships.
09/22/11 12:53 PM
Estate Planning, Family Law, Tax | Comments Off |
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IRS Publishes Guidelines for Domestic Partners and Same-Sex Spouses
By Christopher D. Vanderbeek
Good news for Missouri: A survey conducted recently by the United States Chamber of Commerce has determined Missouri to be the seventh most business-friendly state in the country, according to its ranking in the survey’s “taxes and regulation” category.
The category took into account five criteria affecting businesses and economic functioning: overall state and local tax burden, corporate tax burden, impact of “government-imposed and related costs” on small businesses and entrepreneurs, anticipated state budget gap in fiscal year 2012, and cost of living. Missouri was ranked in the top twenty in all five criteria. It ranked eighth in terms of cost of living.
The study specifically recognized Missouri for “comprehensive reforms” in its workers’ compensation system in recent years. This language undoubtedly refers, at least in part, to the sweeping amendments enacted in 2005. Prior to 2005, the system generally favored injured employees. However, the 2005 amendments dramatically shifted the landscape in favor of employers. A microcosm of the shift can be found in Missouri’s statutory directive regarding judicial interpretation of workers’ compensation statutes: prior to 2005, judges were directed to generally interpret the statutes liberally and in favor of employees, but the 2005 amendments called for “strict interpretation” of all statutes and struck the language regarding favoring employees.
The survey further noted the recent passage of legislation in Missouri to eliminate the state franchise tax. It is suggested that the measure will save Missouri businesses $80 million over the six-year period during which the tax is phased out.
Finally, the survey credited Missouri’s tax credit programs and state tax structure with providing corporations with “one of the most favorable situations in the nation.” For example, the state only considers income earned within the state taxable. Furthermore, manufacturer inventories (such as raw materials), as well as goods held by retailers, distributors and wholesalers, are exempt from property taxes.
What this means for Missouri businesses is, essentially, that Missouri is a great place to start, run, or relocate a business. The state tax structure allows businesses to keep a higher percentage of earned income than they would be able to keep in most other states. In addition, the employer-friendly workers’ compensation system keeps workers’ compensation insurance carriers’ liability exposures down relative to other states, which in turn bolsters relative the earning capacities of Missouri businesses even further.
The full U.S. Chamber survey report is available here.
07/18/11 7:36 AM
Business Law, Emerging Business, Tax | Comments Off |
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Missouri Ranks High for Businesses in U.S. Chamber Survey
By Patrick J. Murphy
With the passing of the health care bill, there are a number of new tax code provisions and many people are concerned about how these new provisions will affect them. One of these new tax code provisions is the 3.8% Medicare tax that applies to “net investment income,” which is such items as interest, dividends, annuities, royalties, rents, and net gain on the sale of property (like your primary residence). One of the misconceptions about the new 3.8% Medicare tax is that it will affect a number of people when they sell their primary residence for a gain. Fortunately, this new tax will only affect a small percentage of people who are high income taxpayers.
One reason the new tax will not impact many taxpayers is the current exemption for gain on the sale of your primary residence. For single individuals, they are able to exclude the first $250,000 in gain from the sale of their primary residence. For married couples, the first $500,000 in gain from the sale of their primary residence is excluded. As a result, depending upon the taxpayer, the first $250,000 or $500,000 may be excluded from gross income and would not be subject to the 3.8% tax. The only individuals who should be concerned about the 3.8% Medicare tax is individuals who sell a second home or a have a very large gain on the sale of their primary residence.
Another reason that the new 3.8% Medicare tax will not affect many people is that it only applies to high income individuals. The tax will only be incurred when a single individual has adjusted gross income over $200,000 or when a married couple filing jointly has adjusted gross income over $250,000. Only a small percentage of taxpayers earn incomes over these threshold amounts, even for taxpayers who sell their primary residence for a gain over the $250,000/$500,000 exemption.
Therefore, due to the $250,000/$500,000 income exemption and the tax’s income thresholds, the only individuals who will be affected by this tax are high income taxpayers. If you believe you may be subject to the 3.8% Medicare tax due to a sale of your primary residence or otherwise, it is important that you speak with your tax attorney or accountant to develop a tax planning strategy to minimize the impact of this new tax. The goal behind the tax planning will be to minimize your adjusted gross income through such strategies as recognizing losses at the time you sell your primary residence or purchasing municipal bonds which pay tax-exempt interest. Through proper planning, you can minimize the impact of this new tax.
02/15/11 5:00 AM
Real Estate, Tax | Comments Off |
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Will There be a 3.8% Sales Tax When You Sell Your Home?
By Misty A. Watson
For trustees and personal representatives of 2010 estates, new legislation passed on December 17, 2010, provides two options for tax treatment of assets from an estate created in 2010.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 made sweeping changes to estate taxes for 2011 and 2012 and retroactively made several changes for estates in 2010.
The new estate tax law allows an estate created in 2010 to elect out of the estate tax for 2010 which results in the application of the modified carryover basis rules.
Option One – Modified Carryover Basis
Elect out of the estate tax and complete IRS Form 8939 to allocate which assets in the estate will have their basis increased to the value of the assets as of the decedent’s date of death. This allocation is limited to $1,300,000 for non-spouse beneficiaries and $3,000,000 for a spouse beneficiary.
The executor of the estate is given the authority to complete the Form 8939 and make such allocations of the basis. There are also additional increases for capital loss carryovers and other losses. The proposed allocation must be provided to the beneficiaries prior to the election.
The basis step-up still does not apply to property which is considered “income in respect of a decedent” which includes traditional IRAs and 401(k)s.
Option Two – Five Million Dollar Estate Tax Exemption
Elect to subject the estate assets to estate tax and obtain a basis increase for all assets of the estate. The estate tax exemption amount was increased to $5 million for 2010 at a rate of 35% tax for assets over the $5 million.
For 2010 estates under $5 million, electing into the estate tax makes perfect sense.
If the decedent’s total value of assets on his or her date of death was under $5 million, electing into the estate tax allows the basis of the assets to be increased to a maximum of $5 million (depending on the date of death value) without paying estate tax. Even 2010 estates which have assets over $5 million need to evaluate whether electing to pay the estate tax would result in less tax than electing to allocate the limited basis amounts.
Similar to the modified carryover basis rules, IRAS, 401(k)s, and other qualified retirement plan assets are not eligible for a basis increase.
Action Steps
Whether to elect in or out of the estate tax exemption is unique to each situation.
Trustees and personal representatives of 2010 estates are advised to seek professional advice on which election is best. A fiduciary for a 2010 estate making the modified carryover basis election should carefully weigh each election against the duties the fiduciary owes to each beneficiary of the trust or estate.
Notice of the election and which assets are being chosen for the carryover basis step-up should be provided to each beneficiary prior to the election being made. All elections should be completed in a timely manner to comply with the Act’s requirement of filing such elections with the IRS within nine months from the date of enactment.
01/18/11 6:00 AM
Estate Planning, Tax, Trusts | Comments Off |
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Important Tax Options for Estates of Those Who Passed Away in 2010
By Patrick J. Murphy
Buried within just 23 lines of Section 9006 of the Healthcare reform bill, The Patient Protection and Affordable Care Act, H.R. 3590, 111th Congress, signed into law by President Obama on March 23, 2010 is a dramatic change to the 1099 reporting requirements.
Prior law IRS reporting laws required, generally, that if a business made payments in excess of $600 to a person or a business over the course of a year, the business was required to file a Form 1099 to report those payments. One copy would be sent to the IRS, another copy was sent to the person/unincorporated business to whom you paid in excess of $600. Payments made to a corporation and payments made in exchange for merchandise were generally not required to be reported.
Now, beginning January 1, 2012, every business, both large and small, will be required to issue additional tax documents to any vendor of services or property to which the business has paid more than $600 to in a tax year. As before, the business will need to send the tax form to both the IRS and to the person who received payments. The Form 1099 will need to be issued for basic business expenses such as airlines, hotels, rental cars, and restaurants, according to the Small Business Legislative Council. Also, for a business who sells or distributes goods, all of their suppliers of inventory are also considered vendors under this law. This new 1099 trail would expose payments to small operators that might now be going unreported, and which the federal government expects to cause a dramatic revenue increase to offset the cost of the health bill.
In addition to issuing the Form 1099s to all its vendors, a business will also have to obtain Taxpayer Identification Numbers (TINs) from all qualifying vendors. If the business is unable to do so, the business will be required to withhold a portion of the vendor’s payment and send it instead to the IRS. If a business fails to accurately file their 1099s, significant penalties can apply. Hopefully technical corrections will be made to this legislation to lessen the record keeping and reporting burden placed on small businesses by these requirements.
07/27/10 3:00 PM
Business Law, Tax | Comments Off |
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A New Headache for Business Owners – The IRS Form 1099
By Brian S. Weinstock
Recently, the Department of Labor advised that they are in the process of developing information to provide direction for Rollovers as Business Start-ups known by the IRS as ROBS transactions.
The IRS issued a memorandum on October 1, 2008 warning about potential pitfalls for ROBS transactions particularly related to prohibited transactions. Moreover, the Department of Labor and the IRS have indicated that a large percentage of ROBS transactions do not comply with federal rules and regulations with regard to tax-deferred retirement plans such as qualified 401k plans and IRAs.
According to Louis Campagna, Chief of the Fiduciary Interpretations Division for the Department of Labor’s Employee Benefits Security Administration, the direction being produced by his department shall address the Department of Labor’s apprehension with regard to ROBS transactions initiated with rollovers from employer sponsored qualified plans and individual retirement accounts, such as 401k plans and IRAs, in order to allow a professional to assess whether the ROBS transaction could be a prohibited transaction.
The Department of Labor is concerned with the employer’s intent when the ROBS transaction is initiated.
Specifically, the Department of Labor needs to determine whether the ROBS transaction was initiated to implement a lawful way for employees to save money for retirement or is the ROBS transaction being used to shelter income for taxpayers who want to start a business or capitalize an existing business. The latter would allow for the taxpayer to withdraw funds from the C-corporation with the 401k plan for reasons unrelated to the business. If so, the taxpayer could withdraw funds, which where designated as tax-deferred, before they are allowed to be withdrawn tax free.
The IRS has their own concerns with ROBS transactions such as the valuation of the transaction and their compliance with other rules for qualified retirement plans which invest in employer stock, therefore the IRS may publish their own memorandum with respect to the issues they have concerning ROBS transactions.
Besides the complex rules and regulations governing prohibited transactions, another major concern for the IRS is the ability to “unwind” ROBS transactions which have violated IRS rules and regulations for qualified retirement plans. If a 401k plan participates in a prohibited transaction, the entire 401k plan loses its tax deferred status. Therefore, the entire 401k becomes taxable. Another major issue is deterioration of the initial ROBS valuation. Many small to medium size business holders remove cash from the entity for reasons unrelated to the business. This type of action can cause a decrease in the initial value of the ROBS transaction and violate prohibited transaction rules and regulations.
Time is of the essence with respect to hiring a professional to review your ROBS transaction in order to determine if there have been any violations of federal rules and regulations, such as prohibited transactions. The IRS has a self-correction program for 401ks which taxpayers can take advantage of before an IRS examination.
06/9/10 7:30 AM
Business Law, Emerging Business, Tax | Comment (1) |
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ROBS transactions: the Department of Labor and IRS Regulation
By Patrick J. Murphy
What Is the Employment Tax Compliance Program?
The Employment Tax Compliance Program (ETCP) is an Internal Revenue Service (IRS) program which aims to lessen the income tax gap. The ETCP plans to do this by auditing 6,000 companies over the next three years to determine if the classification of certain employees within those companies as independent contractors is proper, as opposed to classifying those same individuals as employees. This classification is important for tax purposes as it is easier for taxes to be taken from employees, who are subject to the withholding system, as opposed to independent contractors. Independent contractors are not subject to this same withholding system, which can sometimes lead to the under-payment of taxes. By auditing these companies, the IRS can look to see if individuals who were claiming to be independent contractors are actually employees, and thus would be subject to more regulated taxing.
Who is the Employment Tax Compliance Program Targeted At?
The ETCP will mostly be targeting at those industries which traditionally have individuals working for them that are more often than not considered to be independent contractors. This will include industries such as construction, ground delivery, car service and trucking, to name a few. Unfortunately, there is no specific test which can differentiate an employee from an independent contractor. Typically an independent contractor will have and use their own tools, will create their own schedules and will have numerous “employers,” as opposed to working for the same individual or company for 40-hours-a-week for an extended period of time. However, many of those same factors can be used in finding that an individual is an employee. Determining the difference between the two groups is a very fact-intensive process, specific to each situation.
What Will the Audits Consist of?
Typically, the audits will be done on-site and face-to-face with an agent. Other information which will be pertinent to the audit will be documents provided by the IRS and information which can be gathered from the internet. As stated above, the audit will focus on the proper classification of individuals as independent contractors or employees.
What Can You do to be Prepared?
To be adequately prepared if the IRS should contact your business, one must be cognizant of those employees who may garner extra attention. These employees will be those who have been previously been classified as independent contractors, but perhaps for consecutive years have received a W-2 from your company. It would be prudent to gather documentation about these employees which bolster their independent contractor status (e.g. contracts, agreements between parties, etc.). Small changes in your relationships with these employees for the future might also help to bolster their status as independent contractor.
Businesses also should keep in mind Section 530 of the Revenue Act of 1978. This section allows for individuals who have long been classified as independent contractors to remain as such, so long as the requirements for “substantive consistency,” “reporting consistency,” and “reasonable basis” are met.
05/28/10 1:20 PM
Business Law, Employment Law, Tax | Comments Off |
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The Employment Tax Compliance Program—And What It Means for Businesses
By Brian S. Weinstock
Currently, the Missouri legislature is debating on whether to restructure the state’s historic tax credit program given the state’s budget crisis. Governor Nixon apparently believes that the state’s historic tax credit programs are large and have been usurping state funds that could go public schools, colleges and universities. Therefore, his administration believes that these programs need to be reformed to free up cash flow for other state programs. Governor Nixon’s administration has proposed creating new statutes for six separate state historic tax credit programs with discretion on the amount awarded, whether to award any amount at all, whether to award any or all of a particular year’s credits allocation and whether to cap certain tax credits at $314 million a year. No rules or regulations have been set in place for the Missouri Department of Economic Development to even make these types of determinations which will only serve to complicate the process even though the current process has been recognized as a national model.
In 1999, The Wall Street Journal published an article entitled “In St. Louis Developers Bank on Tax Credits” wherein the author called the Missouri Historic Tax Credit program “a national model.” The article explains “the Missouri program provides state income tax credits for 25% of eligible rehabilitation costs of approved historic structures. The credit which has no cap applies to both residential and commercial buildings and can be used in conjunction with the 20% federal historic tax credit. In addition, the state tax credit is transferable: Mercantile Bank (now US Bank) has set up the Missouri Tax Credit Clearinghouse to buy and sell credits.” Rehabilitation construction projects such as Cupples Station, the Chase Park Plaza and projects on Washington Avenue and surrounding areas in downtown St. Louis would not have taken place without these tax credits. Without these tax credits, these properties would most likely continue to be an eye sore for the community and definitely not creating new jobs nor increasing state and local government revenue.
The Missouri Growth Association (MGA) and St. Louis University performed a ten year study with regard to Missouri’s historic tax credit programs. In March 2010, they released their conclusions which revealed that the Missouri historic tax credit program contributed to the creation of over 43,000 Missouri jobs with average salaries of $42,732, $669 million in newsales, use and income tax revenues which directly benefited the state and local governments as well as $2.9 billion in private investment in Missouri. According to the Missouri Department for Economic Development, Missouri Historic Tax Credit projects created 4,900 Missouri jobs in 2007, which according to David Listokin of Rutgers University Center for Urban Policy Research, equals 38 jobs per $1 million invested or more jobs than highway or new construction projects. Moreover, the Missouri Department of Economic Development noted that from 1998 – 2008 over $4 billion of investment had been leveraged throughout Missouri as a result of the Missouri Historic tax Credit Program as well as $858 million being invested in 2008. In addition, the Missouri Department of Economic Development has concluded that over 66 communities in Missouri have taken advantage of these historic tax credit programs.
According to the Downtown Community Improvement District (2009), St. Louis City alone has 5,000 new residents as a direct result of Missouri’s Historic Tax Credit programs which caused the city to have its first population increase in fifty years. All of these new residents as well as visitors are paying new local taxes to the state and St. Louis City.
The discussion of removing or capping Missouri’s Historic Tax Program would have zero effect on the 2010 budget since historic tax credits have already been approved for this year. Any change to the Missouri Historic Tax Credits programs would only affect future state budgets. If the state historic tax programs are changed, developers would then analyze the cost to renovate a historic building with the potential revenue. In addition, changes to the programs or uncertainty in the programs will cause more problems for developers in terms of financing a project. At this time, developers are having a hard time financing projects as a result of new internal lending policies and procedures. Many lenders are requiring anywhere from 40% percent equity to 100% collateralization in order to obtain a loan. If the state has a stable historic tax credits program, a developer can leverage those funds to aid in financing a project.
While Missouri is debating whether to institute significant changes to the Missouri Historic Tax Credits programs which was deemed “a national model”, Kansas removed its historic tax credits cap. Further, Iowa increased their historic tax credits cap and Illinois is organizing a historic tax credit program. If Missouri wants to continue to grow jobs, grow revenue for state and local governments as well as increase private investment; particularly, when the country and the state are hopefully coming out of a significant economic recession, the Governor and state legislators need to think long and hard about altering a extremely successful state historic tax credit program which is not only the envy of many other states but has been recognized on a national level.
05/13/10 12:00 PM
Real Estate, Tax | Comments Off |
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Missouri Historic Tax Credit
