KLR Tax Blog - Providence, Rhode Island, Newport, Boston, Massachusetts

By Paul Oliveira, CPA

Under the New Jersey Emerging Technology and Biotechnology Financial Assistance Program, emerging technology and biotechnology companies may be allowed to transfer unused net operating losses and research and development credits to another corporate entity through a certificate program in exchange for private financial assistance from the entity acquiring the surrendered tax benefits. For those companies that qualify, the program could provide the opportunity to unlock some immediate value from their net operating loss and R&D credit carry forwards in New Jersey by “selling” them to another corporate entity for cash, which would then need to be reinvested in their business operations in New Jersey.

A new or expanding emerging technology or biotechnology company seeking to transfer tax benefits to a corporation business taxpayer in exchange for private financial assistance must utilize the proceeds to fund expenses incurred in connection with its operations in New Jersey. This reinvestment of proceeds could include expenses relating to:

• The purchase of fixed assets
• Tenant fit-out
• Working capital
• Salaries
• Research and development, etc.

There are also requirements that the company receiving proceeds under this program continue or maintain its headquarters operation or base of operations in New Jersey for a period of time after receipt of the proceeds.

Participation in the program is subject to an application process which is administered by the New Jersey Economic Development Authority. Applications are due by June 30 each year.

If you have qualifying technology or biotechnology companies in your portfolio that have ongoing operations in New Jersey, this program offers the potential of generating an immediate cash infusion without any further equity dilution or interest cost. KLR can help in determining whether your portfolio company qualifies for the program, determine how much combined tax benefits the company has available for surrender in exchange for private financial assistance, prepare the documentation necessary to support the amount of R&D credits generated in New Jersey, as well as assist with the application process and identification of a buyer.

By Timothy J. Sullivan, CPA, MST

Widely unknown and a little stealthy, Congress passed two tax increases in 2010 as a sliver of the Health Care Reform Act.  These two increases become effective January 1, 2013 and will increase the amount of Medicare tax paid by certain high income earners.

The first new tax is a 3.8% medicare surcharge on investment income. 

1. For purposes of this tax investment income is defined to include taxable interest and dividends, long and short term capital gains, annuity income, passive rental income and royalties.
2. Distributions from pensions and other retirement accounts are not considered investment income.
3. The 3.8% tax is assessed on the smaller of taxpayer’s net investment income or the amount of Modified adjustment gross income in excess of a threshold amount.  The threshold modified AGI amount is $200,000 for single filers and $250,000 for married joint filers.

The second new tax, also effective January 1, 2013, is a .9% medicare surtax on wages and self-employment income in excess of the above noted threshold amounts.

You don’t want to be caught off guard with your tax planning or forget to pay these on time.  If you’re unsure of whether or not you’ll be penalized for the High Income Earner Medicare Tax and don’t want to end up owing thousands—feel free to contact me for help decoding your potential tax increases.

By Robert D'Andrea, CPA

On September 19, Senate Finance Committee Chairman Max Baucus [D-MT] and Senator Orrin Hatch [R-UT] filed new legislation that would simplify and make permanent the R&D Tax Credit.

Under the current law, the R&D tax credit can be calculated by either of two methods, the “regular credit” method and the “alternative simplified credit” method, both of which provide a tax credit relating to incurred qualifying research expenses such as labor, materials and contracted costs.  The more-complicated regular credit method; however, has drawn criticism from taxpayers for being outdated.

The Legislation would simplify and update the research credit significantly. It would increase the value of the alternative simplified credit from 14 percent to 20 percent of average qualifying research expenses. It would also allow the regular credit to expire at the end of 2011.  The Baucus-Hatch bill would make the simplified R&D credit permanent.

R&D expenditures generally include all expenditures incident to the development or improvement of a product.  R&D expenditures include the expenditures of obtaining a patent, such as attorney’s fees expended in making and perfecting a patent application. The term “product” includes any the following:

• Formula
• Invention
• Patent
• Pilot Model
• Process
• Technique
• Similar Property

Expenditures Not Included
R&D expenditures do not include expenditures for any of the following:

• Quality control testing
• Advertising or promotions
• Consumer surveys
• Efficiency surveys
• Management studies
• Research in connection with literary, historical, or similar projects
• The acquisition of another’s patent, model, production, or process

Please contact me any time with questions regarding R&D tax credits or check out our website for more information.

By Mark Schofer, CPA

As we enter 2012, the countdown to the January 1, 2013 implementation of the Foreign Account Tax Compliance Act (FATCA) is now officially under one year.  FATCA is a set of laws that impose mandatory U.S. federal withholding on payments of U.S. source income to the following two types of non-complying entities:

1. Foreign financial institutions
2. Nonfinancial foreign entities

The definition of a foreign financial institution includes banks and brokerage firms.  These types of organizations are commonly thought of as financial institutions.  However, the definition also includes private investment funds which would include hedge, private equity and venture funds. 

To read more on the Foreign Account Tax Compliance Act (FATCA) see our News & Events page.

By by John E. Surrette, Jr., CPA, CFE

A day doesn’t go by where you are not told to protect your confidential information from prying eyes.  Whether it is on television, radio or the internet, we are constantly told to keep an eye on our credit reports and bank accounts for fraudulent activity.  One area, however, that doesn’t receive as much attention is your tax filings with the IRS.

Recently, the IRS issued notices FS-2012-7 and FS-2012-8, alerting taxpayers to the threat of identity theft and fraudulent tax filings.  Identity thieves are now producing fraudulent tax returns in order to claim tax refunds that you may be otherwise entitled to. Imagine filing your tax return expecting a refund and instead receiving a notice from the IRS stating that more than one tax return was filed under your social security number. 

You need to be vigilant in protecting yourself from identity theft, including:

• Do not carry your social security card with you
• Closely guard your personal financial information
• Check your credit report at least annually
• Do not provide your social security number or any other personal identifiable information to anyone whom you do not trust (including responding to unsolicited emails).

Remember, anyone with a legitimate need for such information WILL NOT contact you via email (including the IRS, who explicitly state that they will NOT initiate contact with taxpayers via email). 
If you feel you have been a victim of identity theft, you need to contact the IRS and your creditors, including the major credit bureaus, immediately. For your reference, below is the contact information for the IRS and the credit bureaus:

IRS               www.irs.gov                                           1-800-908-4490
Equifax       www.equifax.com                               1-800-525-6285
Experian       www.experian.com                         1-888-397-3742
TransUnion       www.transunion.com               1-800-680-7289

The IRS has also set up a couple of websites to provide you with more information, including the Taxpayer Guide to Identity Theft and the IRS Identity Theft Protection page.

If you have any questions about further measures that can be taken to protect your personal financial information, please do not hesitate to contact me.

By Jade Toher, CPA

As you begin to gather your tax information to send to your accountant, you should be aware of some changes in the tax law that you may be able to take advantage of.  This is not an all-inclusive list, so be sure to consult your tax advisor.

1. Tax Benefits Extended: Recent legislation has extended some of the tax benefits that were available in prior years.  The American Opportunity credit for parents and students has been extended and is available to claim on 2011 tax returns.  If you have a child in college, be sure to discuss this and other education options with your tax advisor.  The Enhanced Child Tax Credit of up to $1,000 per child has also been extended and is available to taxpayers with one or more qualifying children. 
2. Non-business Energy Property Credit: The Internal Revenue Service has also limited the Non-business Energy Property Credit.  Taxpayers can claim a credit for up to $500 for certain home improvements placed in service during 2011, up to 10% of the cost of qualified energy-efficient property or improvements. 
3. First Time Homebuyer Credit: If a taxpayer claimed the first-time homebuyer credit on their 2008 income tax return, the second of 15 annual installments is due with their 2011 tax return.  Note that repayment will also be required if a taxpayer purchased a home and claimed the credit on a prior return and subsequently sold it or stopped using it as their primary residence in 2011. 
4. ROTH IRA Conversions: For any individual who converted a qualified retirement plan into a ROTH IRA at any point during 2011, the entire amount of the conversion must be reported on the 2011 tax return.  For those that converted to a ROTH IRA during 2010, the first installment of the conversion amount is reportable on the 2011 tax return.
5. Standard Mileage Rate Increase in 2011: The standard mileage rate was increased from 50 cents a mile to 51 cents a mile for January through June of 2011 and 55.5 cents a mile for the rest of the year. 
6. Self-Employed Health Insurance Deduction: One of the benefits available for self-employed individuals is the ability to deduct the amount paid personally for health insurance.  This deduction remains available for 2011 and premiums paid to cover an adult child under age 27 at the end of 2011 also qualify for the deduction.  As in prior years, the insurance plan must be set up under the taxpayer’s business and the taxpayer cannot be eligible to participate in an employer-sponsored health plan.

These and other benefits have been made available for taxpayers by Congress and it is important that you know your available options. Do you have questions? Please feel free to contact me jtoher@kahnlitwin.com at any time. I would love to hear any of your success stories from years past below.

By Norman LeBlanc, CPA & Paul Oliveira, CPA

Well, the rumors were true. IRS has announced a third program to assist people with unreported offshore accounts to come forward and get current on their US reporting obligations, subject to penalties.

Interestingly enough, unlike the previous programs that IRS had conducted in 2009 and 2011, this new initiative does not contain a deadline. With that said, the current terms of the new program, and even its future existence, can be changed solely IRS’ discretion.

The penalty regime under the new program is very similar to what existed under the 2011 initiative. However, the penalty on the highest aggregate account balance in the taxpayer’s foreign bank accounts during the years in question has been increased from 25% to 27.5%. Individuals with offshore accounts or assets with a value of less than $75,000 in any calendar year could qualify for a lower 12.5% penalty. In some narrow circumstances, taxpayers could even qualify for a 5% rate. As an example, foreign residents who were unaware that they are US citizens might qualify for this 5% rate.

Those who come forward under this new initiative will need to file all original and amended returns for the affected years and pay any tax and related interest for up to eight years. Accuracy and/or delinquency penalties can also apply.

If you have any questions, please don’t hesitate to contact Paul Oliveira or Norman Leblanc.

By Norman LeBlanc, CPA

As states work to accelerate revenue and trim costs from their budgets, more and more are adopting the required use of automation to process and collect tax forms and the related payments.  What these requirements don’t often seem to address is that not every taxpayer makes use of technology and the internet.

Massachusetts adopted mandatory eletronic filing and paying of income tax extensions for certain taxpayers as early as 2004.  Originally the qualifying thresholds were set high enough that only the largest companies were required to comply.  However, every year since, the thresholds have been lowered and expanded.  Currently the mandate is to electronically file and pay extensions in Massachusetts for individuals remitting either a zero payment or more than $4,999 with their extension request.  For businesses the threshold is $100,000 in gross sales or a payment of $5,000 or greater.  Massachusetts is currently imposing a penalty of $100 for failure to comply with their electronic payment mandates. 

In 2009, CA adopted tax statutes that require all payments be made electronically once a business or individual taxpayer’s total tax for the year exceeds $80,000 or their estimated and extension payments exceeds $20,000.  California also imposes penalties for failure to comply with electronic payment requirements.

More recently, the State of New York began requiring businesses to make estimated tax payments electronically as of December 1, 2011.  This rule applies to all but the smallest businesses.  And much like Massachusetts and California, there are penalties that can be imposed on the taxpayer and or tax preparer for failure to comply.  Currently those are $50 for failure to file electronically, another $50 for failure to pay electronically, and 5% per month on any tax unpaid after the original due date of the return (maximum of 25%).

These are just some of the income tax states requiring electronic filing and payments.  There are many others such as Texas, West Virginia, and Florida with similar requirements and several others, such as Louisiana which are in the process of adopting them.  And regardless of each state’s income tax requirements, almost all states now have mandatory filing and paying of other types of tax such as payroll and sales taxes.

If you have questions or concerns about any of these types of payments, please contact a member of our tax services team and we will be glad to assist you in navigating this ever changing landscape.

By Tracy O’Brien, Tax Senior

As the end of the year nears, it is time to consider what actions can be taken to reduce your tax bill.  It is not too late to assess your tax situation and look into opportunities that may significantly reduce what you owe as tax year 2011 draws to a close.

1. Tax Extenders: An item to keep in mind as the end of year quickly approaches, a number of tax extenders are scheduled to expire after December 31, 2011, as of this writing.  They include, state and local sales tax deduction, higher education tuition deduction and teacher’s classroom expense deduction.
2. Capital Gain & Losses: Timing is everything.  Timing the recognition of capital gains and losses at year-end may help minimize your net capital gains tax and maximize deductible capital losses.
3. Mutual Fund Distributions: Consider redeeming mutual fund shares in taxable accounts before any year-end dividends are distributed, as they are generally taxed as ordinary income. 
4. Charitable contributions: ‘Tis the season to be giving. Not only does charitable giving benefit others but it may provide valuable tax deductions.
5. Those who are age 70 ½ and older should also consider making a donation to a qualified charity directly from their IRAs up to $100,000 in order to avoid taking the distribution into taxable income, thus paying no tax on the distribution.  This tax break, especially advantageous to those who do not itemize deductions, is scheduled to end for distributions made in tax years beginning after December 31, 2011. The amount donated is tax free and can be used to satisfy your Required Minimum Distribution each year.
6. Fund your 2011 IRA contribution early: IRA Contributions are permitted up to the tax filing deadline, but making a contribution now can provide up to four additional months of tax-deferred growth potential.
7. Energy Tax Incentives: For those who have replaced their roof, heating, ventilation and air conditioning systems, or windows and doors with energy-efficient materials this year may have generated tax savings.  Through the end of 2011, a number of residential energy-efficient improvements qualify for a tax credit. (These include qualified windows and doors, insulation products, HVAC systems and roofing. The “lifetime” credit amount for 2011, is $500 and no more than $200 of the credit amount can be attributed to exterior windows and skylights).
8. Gift and Estate Taxes: The annual exclusion allows you to gift up to $13,000 per year per recipient gift-tax-free without using up any of your lifetime gift and estate tax exemptions.  Lifetime gift-giving, ideally on an annual basis, should continue to form part of a master estate plan.  Making a gift at year-end 2011 to take advantage of this annual, per-donee exclusion should be considered by anyone with even modest wealth. A planning tip to consider is the $5 million lifetime gift exemption.  Although considered lifetime and action isn’t necessary by the end of this year, the exemption is scheduled to drop to $1 million on January 1, 2013.  This should be something to keep in mind between now and December 31, 2012.  Though estate planning won’t necessarily affect your income tax bill, it’s a good idea to consider your estate planning goals as year-end approaches.
9. Roth Conversions: For those who have not yet made a Roth conversion, doing so at the end of 2011 might be an opportunity worth serious consideration. Items to consider: Your present income tax bracket. How close you are to retirement. Your access to other funds both to pay the conversion tax and to delay distributions from your Roth account later. 

Tax planning note: If you have converted an IRA to a Roth IRA in 2010, you were given an option to recognize all the income in 2010 or defer that income, half into 2011 and half into 2012.  If you elected to defer that income into 2011 and 2012, do not forget to figure that income into your year-end planning for 2011.

For questions regarding your year-end tax planning please contact any member of our Tax Services Group at TrustedAdvisors@Kahnlitwin.com or call 888-KLR-8557.

By Sean Kelly, CPA

Aside from celebrating the holidays with family and friends, there are only a few other annual events that get accountants really excited.  The IRS’ release of the annual standard mileage rates is surely one of them. 

Internal Revenue Code Section 274(d) allows taxpayers a deduction for the costs of using their vehicles for various purposes.  This code section places very strict and specific documentation requirements on the taxpayer.

Instead of deducting the actual unreimbursed expenses of their vehicles, taxpayers may decide to deduct the standard mileage rate.

Beginning January 1, 2012, the 2012 Standard Mileage Rates are as follows:
Business Use:  55.5 cents per mile
Gratuitous Services to a Charitable Organization:  14 cents per mile
An Automobile used for Medical Care:  23 cents per mile

The standard mileage rate is determined using various factors such as the state of the economy, gas prices, and the estimated cost of normal wear and tear on a vehicle; thus it is intended to reimburse over and above the amounts for which someone pays strictly for gas.

In determining whether to use the actual expenses incurred or the standard mileage rates, consider the following:

1. Are there adequate records to substantiate the deductions? - If you have messy records or are missing receipts and other substantiation for the actual expenses, it makes sense to use the standard mileage rates based upon your driving log.  Keeping track of the miles is much easier than keeping all of the receipts.  With the technology age, Apps like MileBug make it easier to keep a log and track expenses right on your Smartphone.
2. Which deduction is larger? - In cases where the taxpayer’s vehicle is used 100% for business, the taxpayer’s actual expenses will probably be larger than the standard mileage rates.  Where this is not the case, the standard mileage rate may yield a better result.
3. Basis reductions for business use - If a taxpayer uses their automobile for business, a portion of the business standard mileage rate is treated as depreciation, and thus reduces the basis of the automobile by 23 cents per mile for 2012 (22 cents per mile for 2011).  When the taxpayer sells or trades in their vehicle, this will cause a higher realized/recognized gain on the transaction.
4. Reimbursement/Allowances - Mileage or travel reimbursement or allowances may reduce or eliminate the deduction.

A member of the KLR Tax Team can help you with questions regarding the correct choice of method for your travel expenses or any of your year-end tax planning needs. Contact us at TrustedAdvisors@kahnlitwin.com or call 888-KLR-8557.