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:

1. Interest, dividends, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business, and
2. 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
3. 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 pass through 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 a member of the firm's Construction Practice in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040 or visit us on the web at www.uhy-us.com. 

Bonus depreciation is closing for 2014, unless extended by Congress. It was extended by the American Taxpayer Relief Act through the end of the year, although some transportation and longer period property may be eligible through 2014. Otherwise, qualified property must be place in service before January 1, 2014.

Employment in the construction industry had a strong rebound in 2012, but hiring and spending has been neutral for most of 2013. The unemployment rate for former construction employees is decreasing, but construction companies are having trouble filling positions with experienced employees due to changes in the field of work and people going back to school or retiring. Officials in the construction industries are calling for education and immigration reform measures to ensure there is an adequate supply of skilled workers because firms are having trouble finding qualified craft workers and filling professional positions. It is expected that the construction labor shortage will get worse before it gets better. Some construction firms are mentoring future craft workers, participating in career fairs and offering internships for professional positions.

Through August 2013 employment in the construction industry increased in 35 states, but remained below peak levels in most states. This gave warning of a potential impact of a halt in federal construction investments. Michigan ranks thirty-second in state construction employment (seasonally adjusted).

In Michigan, employment in construction increased 2% over the past 12 months (roughly 3,000 jobs). With Flint and Muskegon-Norton Shores showing 14% and 11% growth, respectively. The Metro-Detroit area did not have as much success as the rest of Michigan, showing 0% growth in Warren-Troy-Farmington Hills and -4% in Detroit-Livonia-Dearborn.

The number of available construction jobs has increased in some states, while other states are still struggling to overcome the sluggish market. The state of the construction industry will depend on how the rest of the year goes, but the industry is predicted to grow and create more jobs in 2014. It is also predicted that the industry growth will be 8 percent in 2014. The spending outlook is also positive as the rebounding housing and heavy construction markets will create new construction jobs and help the industry to continue to recover.

As active members of various national, state and local construction associations, state housing councils and specialty trade groups, our team keeps alert to industry trends and opportunities. Our professionals are leaders in the industry and take the steps necessary to ensure our client's future success by identifying and addressing new accounting requirements and regulations. You can depend on us to anticipate major industry issues that might impact your company and help you structure workable solutions.