By now I'm sure you have
heard that congress finally worked out a band-aid, known as the American
Taxpayer Relief Act of 2012 (the Act), which President Obama signed into law on
January 2, 2013. It was not so much a Grand Bargain as an agreement to
kick the can down the road for 2 months before the sequestration (spending
cuts) take effect at the end of February. The delay coincides with the approximate
date the next debt ceiling limit is reached, all pointing to another round of
drama.
President Obama stated he is prepared to work on reducing the deficit, but noted "it's going to have to be balanced" and "that kind of (entitlement) reform has to go hand-in-hand with doing some more work on our tax code so that the wealthy individuals, the biggest corporations, can't take advantage of loopholes and deductions that aren't available....to most Americans". Thus we fully expect additional tax changes to be proposed in the coming months. Stay tuned.
Below is a summary of the key provisions likely of interest to the venture capital community. It is by no means an exhaustive list but hopefully hits the high points. The full text of the Act is attached.
Personal Tax Provisions:
1. Tax Rates: The Act makes permanent the Bush era income tax rates for all taxpayers except those with taxable incomes above $400,000/single or $450,000/married-filing-joint. Income above these levels will be taxed at a rate of 39.6%.
2: Capital Gains and Qualified Dividends: The Act raises the top rate for capital gains and qualified dividends to 20%, and applies to the extent that a taxpayer's income exceeds the thresholds set for the 39.6% bracket described above. Taxpayers with incomes below this threshold will continue to benefit from the lower capital gain and qualified dividend rates (a maximum of 15%).
3. Limitation on Itemized Deductions: The Act reinstates the limitation on itemized deductions, known as the PEASE limitation, for taxpayers with AGI's over $250,000/single or $300,000/married-filing-joint.
4. Alternative Minimum Tax (AMT): The Act made permanent the "patch" to adjust the AMT exemption amounts and provide an annual inflation adjustment to future exemption amounts. Even with this adjustment, many higher income taxpayers, especially those residing in high tax jurisdictions such as California , will continue to find themselves subject to AMT.
5. Estate and Gift Taxes: The Act permanently provides for a maximum federal estate tax rate of 40%, with an exclusion of $5 million that will be annually adjusted for inflation ($5.12 million for 2012). It also makes permanent the "portability" of unused exclusions to a surviving spouse. The gift tax was also permanently reunified with the estate tax and is effective for gifts made after December 31, 2012.
6. Retirement Savings: The Act allows taxpayers to roll-over certain 401(k) assets into Roth accounts, lifting the age and qualified event restrictions. Congress adopted this change because the conversion is a taxable event which will raise revenue (and was used to help pay for the 2 month sequestration delay).
7. Other items of interest: Note that the Act does not alter then new 3.8% Medicare tax on net investment income, effective Jan 1, 2013, nor does it continue the 2 percentage point reduction in employee Social Security tax withholding that expired at the end of 2012.
Business Tax Provisions:
1. Section 179 Expensing: The Act extends through 2013 the ability to expense up to $500,000 in qualified assets, with a $2 million investment limit. Within those thresholds, the proposal would also allow a taxpayer to expense up to $250,000 of the cost of qualified leasehold improvements.
2. Bonus Depreciation: The Act extends the 50% expensing provision for qualifying property purchased and placed in service before January 1, 2014.
3. Cost Recovery for Qualified Leasehold Improvements: The Act extends through 2013 the 15 year straight line cost recovery period for certain qualified leasehold improvements.
4. R&D credits: The Act extends through 2013 the research tax credit, which expired after 2011. This provision is likely of keen interest to many of your portfolio companies who take advantage of this valuable credit.
5. Qualified Small Business Stock (QSBS): The Act continues the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired between Sept 27, 2010 and before Jan 1, 2014, and held for more than five years. The bill also clarifies that in the case of stock acquired after February 17, 2009, and before January 1, 2014, the date of acquisition for purposes of determining the percentage exclusion is the date the holding period for the stock begins.
6. Subpart F Active Financing Exemption: The Act extends the exemption to the end of 2013.
7. CFC look-through: The Act extends the current look-through treatment to the end of 2013.
8. Exemption from withholding for interest related dividends: The Act extends a provision allowing regulated investment companies such as mutual funds, to designate all or a portion of their dividend as an "interest related" dividend. An interest related dividend received by a foreign person generally is exempt from US withholding. The extension applies to taxable years of the RIC beginning before January 1, 2014.
California Update on QSBS:
Just before the holiday break, in the true spirit of the Grinch who stole Christmas, the FTB announced their position to no longer allow any small business stock exclusions in California . Their announcement was in response to the recent court of appeals decision that California 's limitation of QSBS to companies with 80% of sales and 80% of payroll in the state violated the federal Commerce Clause.
The FTB has decided that since certain provisions were held unconstitutional, the entire provision is deemed invalid and unenforceable. (FTB Notice 2012-03). Accordingly they will deny the exclusion for 2012 and later years, and will also disallow exclusions claimed by taxpayers for years beginning on or after January 1, 2008. The notice outlines alternatives for taxpayers to amend returns, self assess, and pay the additional tax, or wait for a Notice of Proposed Assessment denying the exclusion.
President Obama stated he is prepared to work on reducing the deficit, but noted "it's going to have to be balanced" and "that kind of (entitlement) reform has to go hand-in-hand with doing some more work on our tax code so that the wealthy individuals, the biggest corporations, can't take advantage of loopholes and deductions that aren't available....to most Americans". Thus we fully expect additional tax changes to be proposed in the coming months. Stay tuned.
Below is a summary of the key provisions likely of interest to the venture capital community. It is by no means an exhaustive list but hopefully hits the high points. The full text of the Act is attached.
Personal Tax Provisions:
1. Tax Rates: The Act makes permanent the Bush era income tax rates for all taxpayers except those with taxable incomes above $400,000/single or $450,000/married-filing-joint. Income above these levels will be taxed at a rate of 39.6%.
2: Capital Gains and Qualified Dividends: The Act raises the top rate for capital gains and qualified dividends to 20%, and applies to the extent that a taxpayer's income exceeds the thresholds set for the 39.6% bracket described above. Taxpayers with incomes below this threshold will continue to benefit from the lower capital gain and qualified dividend rates (a maximum of 15%).
3. Limitation on Itemized Deductions: The Act reinstates the limitation on itemized deductions, known as the PEASE limitation, for taxpayers with AGI's over $250,000/single or $300,000/married-filing-joint.
4. Alternative Minimum Tax (AMT): The Act made permanent the "patch" to adjust the AMT exemption amounts and provide an annual inflation adjustment to future exemption amounts. Even with this adjustment, many higher income taxpayers, especially those residing in high tax jurisdictions such as California , will continue to find themselves subject to AMT.
5. Estate and Gift Taxes: The Act permanently provides for a maximum federal estate tax rate of 40%, with an exclusion of $5 million that will be annually adjusted for inflation ($5.12 million for 2012). It also makes permanent the "portability" of unused exclusions to a surviving spouse. The gift tax was also permanently reunified with the estate tax and is effective for gifts made after December 31, 2012.
6. Retirement Savings: The Act allows taxpayers to roll-over certain 401(k) assets into Roth accounts, lifting the age and qualified event restrictions. Congress adopted this change because the conversion is a taxable event which will raise revenue (and was used to help pay for the 2 month sequestration delay).
7. Other items of interest: Note that the Act does not alter then new 3.8% Medicare tax on net investment income, effective Jan 1, 2013, nor does it continue the 2 percentage point reduction in employee Social Security tax withholding that expired at the end of 2012.
Business Tax Provisions:
1. Section 179 Expensing: The Act extends through 2013 the ability to expense up to $500,000 in qualified assets, with a $2 million investment limit. Within those thresholds, the proposal would also allow a taxpayer to expense up to $250,000 of the cost of qualified leasehold improvements.
2. Bonus Depreciation: The Act extends the 50% expensing provision for qualifying property purchased and placed in service before January 1, 2014.
3. Cost Recovery for Qualified Leasehold Improvements: The Act extends through 2013 the 15 year straight line cost recovery period for certain qualified leasehold improvements.
4. R&D credits: The Act extends through 2013 the research tax credit, which expired after 2011. This provision is likely of keen interest to many of your portfolio companies who take advantage of this valuable credit.
5. Qualified Small Business Stock (QSBS): The Act continues the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired between Sept 27, 2010 and before Jan 1, 2014, and held for more than five years. The bill also clarifies that in the case of stock acquired after February 17, 2009, and before January 1, 2014, the date of acquisition for purposes of determining the percentage exclusion is the date the holding period for the stock begins.
6. Subpart F Active Financing Exemption: The Act extends the exemption to the end of 2013.
7. CFC look-through: The Act extends the current look-through treatment to the end of 2013.
8. Exemption from withholding for interest related dividends: The Act extends a provision allowing regulated investment companies such as mutual funds, to designate all or a portion of their dividend as an "interest related" dividend. An interest related dividend received by a foreign person generally is exempt from US withholding. The extension applies to taxable years of the RIC beginning before January 1, 2014.
California Update on QSBS:
Just before the holiday break, in the true spirit of the Grinch who stole Christmas, the FTB announced their position to no longer allow any small business stock exclusions in California . Their announcement was in response to the recent court of appeals decision that California 's limitation of QSBS to companies with 80% of sales and 80% of payroll in the state violated the federal Commerce Clause.
The FTB has decided that since certain provisions were held unconstitutional, the entire provision is deemed invalid and unenforceable. (FTB Notice 2012-03). Accordingly they will deny the exclusion for 2012 and later years, and will also disallow exclusions claimed by taxpayers for years beginning on or after January 1, 2008. The notice outlines alternatives for taxpayers to amend returns, self assess, and pay the additional tax, or wait for a Notice of Proposed Assessment denying the exclusion.
Taxpayers who claimed
the exclusion or deferral for years beginning before January 1, 2008, are not being
asked to amend returns because the statute of limitations is close to expiring
or has expired for most of these returns. If these taxpayers are involved in a
pending audit or appeal, they may still be allowed the exclusion or deferral.
No comments:
Post a Comment