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1040 Review
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Regulations Seek to Clarify New 3.8 Percent Net Investment Income Tax
By Leslie Spisak, CPA
The IRS has issued much-anticipated reliance regulations on the new 3.8% net investment income (NII) tax under the 2010 health care legislation. The surtax came into effect on January 1, 2013 and applies to individuals, trusts and estates. For individuals, the threshold is modified adjusted gross income (MAGI) over $250,000 for joint filers and $200,000 for single filers. Trusts and estates in the highest tax bracket (AGI over $11,650 for 2012) are also subject to the NII Tax. The tax is calculated on 3.8% of the lesser of net investment income for the tax year, or the excess of the individual's MAGI over the threshold amount.
Net investment income subject to the tax is defined as follows:
- Interest, dividends, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business, and
- Other gross income derived from a trade or business, that is either passive (within the meaning of Section 469), or the trading of financial instruments or commodities, and
- Net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business.
The most common items of NII for taxpayers will be interest earned on bank accounts, dividends realized on stock investments paid through brokerage accounts, and net capital gains. For any income that passes through to a taxpayer on a K-1, a determination will need to be made if the income is derived in the ordinary course of the trade or business. As a general rule, if it relates to a trade or business and is non-passive to the taxpayer, the income will be exempt from the 3.8% tax. Conversely, if the income is not related to a trade or business or the income is passive to the taxpayer, the income will be subject to the 3.8% tax.
Interest and dividends earned by a passthrough entity will generally be subject to the 3.8% tax, unless they are related to the trade or business income. Interest on loans made in the ordinary course of lending money, interest on accounts receivable, and gains derived in the activity of trading or dealing property are examples of items that may be exempt if in connection with the trade or business. Earnings from the investment of working capital to be used for the future are not considered derived in the ordinary course of the trade or business (such as income from savings accounts, certificates of deposit, money market accounts, short-term bonds, or similar investments which usually produce portfolio-type income) and as such would be subject to the NII tax.
Whether or not rental income is subject to the 3.8% tax depends upon whether the rental is considered a trade or business. Under the definition, the rents must be derived in the ordinary course of the trade or business to not be subject to the NII tax. Similar to self-rental rules, the determination of whether someone classified as a real estate professional is subject to the tax is determined based upon whether the real estate activities are considered a trade or business. If the taxpayer's activities are determined to be passive, prior year suspended passive losses can be utilized in the year recognized for tax purposes to reduce the passive income subject to the 3.8% tax.
For more information or questions on this topic, please contact your professional at UHY LLP in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040 or visit us on the web at www.uhy-us.com.
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"Amazon Tax": Do You Have a Filing Obligation on Internet Sales?
By Susan Wagner
With the advent of the Amazon Case, the state jurisdictions now have a potential new basis to broaden the state nexus laws for collection of sales and use taxes. This case brought the "remote seller" into the taxing arena, where in the past such internet activity was not a source of tax revenue for the states. Previously, nexus was construed to generally exist if a seller had physical presence within a state. Due to the evolving way business is now conducted, a seller does not necessarily have to be "physically" present in a state to be liable for tax collection.
The "Amazon Tax", also called the "commission-agreement provision" in New York, creates a rebuttable assumption that a seller making sales of tangible personal property or services is soliciting business through an independent contractor or other representative if the seller enters into an agreement with a New York resident under which the resident, for a commission or other consideration, directly or indirectly, refers potential customers, whether by a link on an internet website or otherwise, to the seller ("click-through nexus"). This connection to New York would require an online retailer to collect sales or use tax on products sold to New York residents.
Georgia has enacted recent legislation, effective January 1, 2013, that requires sales or use tax to be collected by out-of-state retailers that have nexus in Georgia by use of affiliates in the state or that use "click-through" marketing, using affiliates within the state. There are a few exceptions: 1) when gross sales from referrals by click through affiliates are under $50,000 annually and 2) for sellers that come into the state to attend trade shows up to five days.
In addition to New York and Georgia, the following states have enacted a form of the "click-through" or "remote seller" law: Arkansas, California, Connecticut, Florida, Illinois, Minnesota, Missouri, North Carolina, Ohio, Pennsylvania, Rhode Island and Vermont. What we are witnessing is an expansion of nexus beyond physical presence, with the result being an expansion of online retailers being subject to the collection and remittance of sales or use taxes for which they previously had not done.
For more information or questions on this topic, please contact your professional at UHY LLP in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040 or visit us on the web at www.uhy-us.com.
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Congress Extends Capital Gains Exclusion for Sales of Small Business Stock
By Robert Kendall
The Creating Small Business Jobs Act of 2010 created an exemption from capital gains tax for investments in qualifying C corporations made between September 28, 2010 and December 31, 2011 and held for five years. After lying dormant for all of 2012, the American Taxpayer Relief Act of 2012 extended the exemption to include investments made in 2012 and 2013.
The exclusion (Code Section 1202) applies to sales of qualifying small business stock (QSB Stock) by individuals, estates, and trusts. For QSB Stock owned by LLCs or partnerships, the exclusion can generally pass through to the members/partners. The primary requirements for stock to be considered QSB Stock include (but are not limited to):
- Must be issued by a C corporation with less than $50 million in assets.
- Must be acquired at its original issue in exchange for money or other property (not including stock), or as compensation for services provided to the corporation. This generally includes stock acquired through the exercise of options or warrants issued as compensation.
- The issuing corporation must be an active business.
The potential for a tax free sale of qualifying stock introduces opportunities to (i) exercise warrants or options received as compensation from a qualifying corporation and avoid future capital gains, (ii) issue stock compensation to employees with an embedded incentive for long-term holding periods, (iii) strategically structure a new or existing enterprise, or (iv) raise capital in a tax efficient manner.
For more information or questions on this topic, please contact your professional at UHY LLP in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040 or visit us on the web at www.uhy-us.com.
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Events Calendar
3/19 Sixth Annual D.M.G.C. Texas Hold Em' Tournament
Tuesday, March 19, 2013
Registration at 6:00 PM. Game starts promptly at 7:00 PM.
Star Lanes at Emagine Royal Oak
200 North Main Street
Royal Oak, MI 48067
$100 buy-in and $50 re-buy. VIP prizes for finalists. Chips have no cash value. Must be 18 to play and 21 to consume alcohol.
Proceeds this year benefit Michigan Lupus Foundation.
Email Lisa Radtke to save your spot at lisa@milupus.org or register online with credit card at milupus.org. Cash, check and credit card contributions accepted at door.
Sponsorship opportunities available. Contact Lisa for details.
Michigan Lupus Foundation in cooperation with the D.M.G.C., the McCarty family and UHY Cares hope to see you there!
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Special Announcements
Experienced Recruiting Update
UHY Michigan is actively looking for experienced candidates to fill key positions in our local offices. Please review the openings below and if you know someone who may be interested in any of these roles please reach out to Rina (Madias) Henning, Recruiting Manager, via email rhenning@uhy-us.com or phone 248 204 9331.
Sterling Heights
Tax Managers
Audit Seniors (2-5 years experience)
CSA (Full Charge bookkeeper with 1040 experience)
M&A Associate (2-5 years experience)
HR Generalist (2-4 years of HR Generalist experience)
Website Content Coordinator (Bachelor's degree in Marketing, Business, Management Information Systems, or Computer Science)
Farmington Hills
Tax Manager
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Published by UHY LLP News.
Copyright � 2013 UHY LLP. All rights reserved.
Our firm provides the information in this newsletter as tax information and general business or economic information or analysis for educational purposes, and none of the information contained herein is intended to serve as a solicitation of any service or product. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of "UHY Advisors." UHY Advisors, Inc. and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent CPA firm that performs attest services in an alternative practice structure with UHY Advisors, Inc. and its subsidiary entities. UHY Advisors, Inc. and UHY LLP are U.S. members of Urbach Hacker Young International Limited, a UK company, and form part of the international UHY network of legally independent accounting and consulting firms. "UHY" is the brand name for the UHY international network. Any services described herein are provided by UHY Advisors and/or UHY LLP (as the case may be) and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members.
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