News Around the Firm

Katz, Sapper & Miller, LLP, is pleased to announce our seventh annual survey assessing the state of Indiana’s manufacturing and distribution industries is now underway. 

The Indiana Manufacturing Survey is conducted in partnership with the Indiana Manufacturers Association, Conexus Indiana, and Indiana University’s Kelley School of Business.

The survey remains open until May 31. Indiana manufacturers and distributors interested in participating are encouraged to do so by visiting the Indiana Manufacturing Survey site. Upon completion of the survey, respondents will have the opportunity to request a copy of the final results, which will be released in mid-2013.

Take the survey

In a recent article authored by Tim Cook, published in the Indianapolis Business Journal, "Economic development deals need to benefit all sides," Cook outlines the various facets of economic development deals; charges officials with educating the public on such deals; and stresses the importance these deals have on Indiana's future economic success.

In a time when state and local officials make economic development announcements every day, an increasingly common question is, “How does this benefit me?”

For the company receiving incentives, that answer is easy enough; whether it be tax credits or a training grant, they receive some form of financial support. But, what about state and local government, and the public at large—what’s in it for them? [Read the full article ...]

Tim Cook is the partner in charge of Katz Sapper & Miller’s State and Local Tax Practice and leads the firm's subsidiary, KSM Economic Development. Tim works closely with companies across the country during the site selection process, assisting with identifying available sites, providing comparative analysis of qualified locations, and assisting in negotiating and securing economic development programs.

Katz, Sapper & Miller, LLP, and KSM Consulting, LLC, have partnered with TechPoint to present the KSM Executive Roundtable series throughout 2013, focusing on major issues technology CEOs are facing. This series offers information that cannot be easily found elsewhere, in a format with a free exchange of ideas with other qualified CEOs.

Our next event, "Valuation & Equity Events: Lessons Learned from Startup to IPO," is Tuesday, March 12.

Recent shifts in financial markets and venture capital investment strategies have led many business owners to question how these changes have impacted their companies' value. There is an art and a science to answering the all-important question: "What is my business worth?"
 
Whether your organization is being acquired, going public, or raising venture capital, the valuation of your business is dependent upon a variety of factors. Join us at the March 12 KSM Executive Roundtable, where our expert guests will relay their recent experiences:

• David Becker, president, CEO & chairman of First Internet Bank, has created and sold numerous companies, recently raising angel investment capital for RICS Software and currently preparing First Internet Bank for a NASDAQ offering.
• Christopher Day, managing principal of Navidar Group, brokered the recent sale of iGoDigital to ExactTarget.
• Tim DuVall will serve as the moderator, lending his expertise as a former CFO and partner at Katz, Sapper & Miller.

The roundtable is limited to a small, manageable group size, and only CEOs or executive managers from technology- or knowledge-based firms are invited to attend. This ensures that discussions are narrowly focused to provide optimal value for our invited guests.

This event is by invitation only. For more information or to RSVP, contact Elizabeth Anderson at 317.275.2080 or eanderson@techpoint.org.

A recent article in INdiana Connections, published by Inside INdiana Business in partnership with Conexus Indiana, highlights the findings of Katz, Sapper & Miller's recently released 2012 Indiana Manufacturing Survey.

"Industry experts liken the past year in Indiana's manufacturing sector to halftime of a football game: players took some hard hits the first two quarters, as the recession did on some Hoosier companies, but they are now examining what worked, what didn't and defining their game-winning strategy moving forward." [Read more ...]

The annual survey is conducted by Indiana University's Kelley School of Business - Indianapolis and is compiled through the combined efforts of Katz, Sapper & Miller, Conexus Indiana, and the Indiana Manufacturers Association. To learn more, download a copy of the survey.

The Indiana Department of Revenue recently announced significant changes to its sales tax policy regarding sales of optional maintenance and warranty contracts. The policy change was announced via an updated Information Bulletin #2, effective Jan. 1, 2013.

Note: The Department's positions on mandatory maintenance contracts and maintenance contracts related to software have been unchanged by the updated bulletin.

The Department's former policy was to treat optional maintenance and optional warranty contracts the same, imposing tax on the sale of either type of contract when it contained a right to have tangible personal property and there was a reasonable expectation that property would be provided under the contract.

The updated bulletin outlines the following state policies:  [Read more ...]

The certified public accounting firm of Katz, Sapper & Miller LLP today released the results of their annual Indiana manufacturing survey. This study of small- to medium-size manufacturing companies was commissioned by Katz, Sapper & Miller and developed in partnership with Indiana University's Kelley School of Business – Indianapolis, Conexus Indiana, and the Indiana Manufacturers Association.

The results from this year’s survey, 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing, indicate that Hoosier manufacturers are stronger this year than at any point since the Great Recession, and are well positioned to compete in the coming years.

“Fundamental changes are continuing to take place across manufacturing in all kinds of capabilities,” said Scott Brown, partner-in-charge of Katz, Sapper & Miller’s Manufacturing and Distribution Services Group. “Businesses are starting to invest for growth, including facilities and automation, with an eye toward providing customers increasing quality at lower prices. While many Hoosier manufacturers have managed to survive the effects of the recession, challenges remain. Of course, not all manufacturers have found the perfect winning strategy, but many are heading in the right direction and some are excelling during these challenging times."

Other key findings reveal:

• Hoosier manufacturers have largely shaken off the effects of the Great Recession and have stabilized their businesses. A significant majority of Indiana's manufacturers now report that their business is either "healthy" or "stable” with tougher times behind them.
• Survey results indicate that the past's relentless rounds of downsizing are over, and while that approach worked well when mere survival was paramount, it is hardly a winning strategy for the future.
• Many Hoosier manufacturers now recognize that the winning strategy is targeted investment aimed at growth. Over 70% of respondents reported that their goals were increasing investment in areas either essential for revenue growth, or across the entire business.
• Indiana remains well positioned to lead American manufacturing. Hoosier manufacturers are highly competitive in a broad variety of industries and products, and, in fact, one in 10 of the companies in this survey are planning to open a new facility in Indiana in the near future.
• A significant number of respondents report that they are onshoring manufacturing back to the United States. Indiana’s competitive advantage remains the fact that nowhere else in America allows manufacturers to position themselves closer to their customers and markets, or offers greater advantages in terms of suppliers and workforce quality.
• Successful manufacturers are continuing to rely on process improvement programs such as "Lean" and "Six Sigma" for implementing change, as well as increasingly taking advantage of advanced automation or smart manufacturing technologies to remain competitive.

Download the complete results of the 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing.

Katz, Sapper & Miller, LLP, and KSM Consulting, LLC, have partnered with TechPoint to present the KSM Executive Roundtable series throughout 2012, focusing on major issues technology CEOs are facing. This series offers information that cannot be easily found elsewhere, in a format with a free exchange of ideas with other qualified CEOs.

Our next event, "Post-Election Prospects for Growth & Technology: A 2013 Business Climate Forecast," is Wednesday, December 5, and will feature Bret Swanson, president of Entropy Economics LLC as well as Entropy Capital.

Bret will address the following topics at the December roundtable:

• What are U.S. business prospects for overall economic growth in 2013, including second-term Obama administration policies?
• If the "new normal" is 2 percent growth or less, what does slow growth mean for jobs, opportunity and governmental budgets?
• What is the "App Economy," and what can we expect from the tech sector in terms of Internet, mobile and cloud computing business segments? 

The roundtable is limited to a small, manageable group size, and only CEOs or executive managers from technology- or knowledge-based firms are invited to attend. This ensures that discussions are narrowly focused to provide optimal value for our invited guests.

This event is by invitation only. For more information or to RSVP, contact Elizabeth Anderson at 317.275.2080 or eanderson@techpoint.org.

Results are in from Katz, Sapper & Miller's 2011 Indiana Manufacturing Survey: Performance, Practice and Strategy, which indicate that Hoosier manufacturers are strong and getting stronger.

“This study has some of the most encouraging findings we've seen in years,” said Scott Brown, partner-in-charge of Katz, Sapper & Miller’s Manufacturing and Distribution Services Group. “It suggests that many Indiana manufacturers are once again investing in their businesses and holding their own against the competition. Such investments and improvements are the key to Hoosier manufacturers remaining successful."

Key findings of the survey reveal:

• A majority of Indiana's manufacturers have maintained a "stable" financial performance over the past two years. Additionally, 60 percent of Hoosier manufacturers reported that they are now increasing investments across the business and in areas essential for revenue growth.
• When asked about future financial priorities, the top goals of Indiana manufacturers are: 1) improving cash flow and working capital management; 2) improving short- and long-term operational efficiencies; and 3) accessing credit for working capital – all strategies designed to improve finances.
• More than 10 percent of survey respondents plan to open new manufacturing facilities in Indiana in the next two years. Just as encouraging, 13 percent of respondents reported that they anticipate relocating or "onshoring" some manufacturing back to America in the next several years. 

This fifth annual survey is a collaborative project with Indiana University’s Kelley School of Business - Indianapolis, Conexus Indiana and the Indiana Manufacturers Association. The survey was designed to provide insights into management choices made by manufacturing and distribution companies across Indiana.

Hoosier manufacturers are strong and getting stronger, according to preliminary results from the 2011 Indiana Manufacturing Survey. The survey is currently underway and is being conducted by Katz, Sapper & Miller, LLP, in partnership with Indiana University’s Kelley School of Business, Conexus Indiana, and the Indiana Manufacturers Association.

When asked about financial performance over the past two years (2009-2010), a majority of Indiana's manufacturers claimed to be either stable (28%) or healthy (24%), while 49% reported that their business was "challenged.” The survey results also show encouraging news in terms of jobs for 2011 and beyond. When asked about their plans for opening new manufacturing facilities in Indiana in the next two years (2011-2012), 11% responded "yes," with 44% responding for existing products, 12% new products, and 44% both existing and new products.

The survey remains open until May 1. Indiana manufacturers and distributors interested in participating are welcome to do so by visiting the 2011 Indiana Manufacturing Survey site. An executive summary of the survey findings will be released later in 2011.

Katz, Sapper & Miller, LLP, and KSM Consulting, LLC, have partnered with TechPoint to present the KSM Executive Roundtable series throughout 2011, focusing on major issues technology CEOs are facing. This series offers information that cannot be easily found elsewhere, in a format with a free exchange of ideas with other qualified CEOs.

Our next event is Tuesday, March 1, 2011, and the topic will be Cloud Computing Security: Overcoming Objections and Eliminating Risks.

Security isn't just an important cloud computing issue - it is THE issue. As the market matures and more companies transition from traditional licensed software to the cloud (in whole or in part), security is paramount for businesses in regulated industries, defense contractors, and those just seeking to protect their data from loss or outside threats.

How, then, should software-as-a-service (SaaS) product and service providers and their suppliers go about eliminating security risks? How should sales professionals overcome objections without overpromising beyond current technological certainties? These questions and more will be part of the discussion led by our panelists, Pat O'Day, chief technology officer of BlueLock; Tim Horoho, vice president of infrastructure at ExactTarget, and Drew Emsweller, manager of Cloud Technology at LightBound.

This event is by invitation only. For more information or to RSVP, contact Jim Jay at jjay@techpoint.org or Kayla Garcia at kgarcia@techpoint.org, or call 317.275.2080.

An inventory method of accounting must be used by a business whenever the production, purchase, or sale of goods produces income for that business. This method of accounting prevents the deduction of various costs related to the production of those goods until the sale of such goods is included in income. As a result, some costs that would otherwise be currently expensed cannot be used to offset income until the inventory items are sold.

The Uniform Capitalization (UNICAP) rules of section 263A of the Internal Revenue Code (IRC) prescribe the method for determining the types and amounts of costs that must be capitalized, rather than expensed in the current period.

The UNICAP rules apply to those, who in the course of a trade or business, produce real or tangible personal property for the use in the business or activity; produce real or tangible personal property for sale to customers; or acquire property for resale. However, if the taxpayer’s annual gross receipts do not exceed $10 million the rules do not apply.

To determine whether or not an activity is a production activity, several factors must be considered, including whether the process adds utility to the product, makes the product more suitable for use or consumption, or transforms the material into more readily marketable materials.

The UNICAP rules require a taxpayer to capitalize all direct costs and certain indirect costs properly allocable to property produced or property acquired for resale.

Direct costs are defined as the direct material costs and direct labor costs for a producer and the acquisition costs for a reseller.

Indirect costs are defined as all costs other than those considered direct material costs and direct labor costs or acquisition costs. Indirect costs are properly allocable to property produced when the costs directly benefit or are incurred by reason of the performance of production activities. Indirect costs can be categorized into two groups: those that must be capitalized and those that are allowed to be expensed in the current period.

The UNICAP rules allow for certain indirect costs to be expensed in the current period. These costs include the marketing, selling, advertising, and distribution expenses, general and administrative expenses not related to production, non-production officers salaries, research and experimental expenses, as well as depreciation, amortization and cost recovery allowances on equipment and facilities that are temporarily idle.

A taxpayer that produces property must capitalize all costs incurred before, during and after the production process of the property. Pre-production costs must be capitalized, including the costs of storing raw materials and the carrying costs related to the holding of realty for future development. Production period costs are those costs that fall between the date on which production begins and production ends. Production is deemed to have ended once the property is placed in service or ready for sale. Any costs incurred after the production process would be considered a post production costs. Post production activities include storage, warehousing, insurance, and handling. Interest, however, need only be capitalized during the production stage.

There are various methods that can be used to allocate the direct and indirect costs to the property produced. Depending on the taxpayer’s needs and type of production, a specific and detailed identification method can be used. These methods, the burden rate method and the standard cost method tend to be rather complex and may not be suitable for all taxpayers.
The most common approach to capitalizing indirect costs to inventory under the UNICAP rules is to use the simplified service cost method in conjunction with its simplified production method.

The approach uses a three step process to apply the UNICAP rules. The taxpayer determines what portion of the mixed service costs is allocable to production. The costs should be classified into one of three different categories:

1. Costs that can be capitalized
2. Deductible costs and
3. Mixed service costs. Mixed service costs are defined as those costs that are only partially allocable to production activities. These costs are generally administrative or supportive in nature.

The taxpayer will then calculate the percentage of additional section 263A costs to capitalize to production costs. The additional 263A costs include mixed service costs allocable to production activities and indirect production costs that have not already been capitalized by the taxpayer. The additional 263A costs are then divided by the current year’s code section 471 costs. These are the costs that were included in the entities method of accounting immediately prior to the effective date of the UNICAP rules. The regulations refer to this computation as the absorption ratio.

Finally, the taxpayer will multiply the computed absorption ratio with the code section 471 costs. The resulting number will then be added to the ending inventory amount.

The UNICAP rules will affect almost any corporation that has inventories. Many of the costs that were previously deductible as period costs are now accumulated and allocated between the costs of goods sold and inventory. The UNICAP rules delay the expensing of capitalized costs which ultimately results in the acceleration of taxable income.

This article was exerpted from The Manufacturing Advisor. For more information about this topic, contact Jolaine Hill.

There’s been much speculation as to what Congress would do about the 2010 estate tax repeal and the scheduled 2011 return of the tax at higher rates and a lower exemption. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 has finally given us an answer, but only through 2012.

Signed into law Dec. 17, the act provides some good news for those concerned about estate tax liability. Rather than simply extending the 2009 rates and exemptions, as many expected Congress would do, the act reduces rates and increases exemptions. It also provides some flexibility for the families of people who died in 2010.

But the outlook isn’t completely rosy. The act provides only temporary relief, so we again face the prospect of much higher rates and lower exemptions in the near future.

Estate tax

The 2010 Tax Relief act gives estates of decedents dying in 2010 a choice. One option is to have the estate tax apply for 2010 with a full step-up in basis for income tax purposes, but with a $1.5 million exemption increase (to $5 million) and a 10 percentage point rate reduction (to 35%) compared to 2009. The other option is to have no estate tax in 2010, with a limited step-up in basis (see “Limited Step-Up in Basis for 2010” below). The new act extends the $5 million/35% levels to 2011 and 2012, with an inflation adjustment on the exemption for the latter year. Then in 2013, the exemption and top rate will return to levels prescribed by pre-2001 tax law — the levels that would have gone into effect in 2011 without the 2010 Tax Relief act.

While the first option above may sound unattractive, it actually may prove beneficial to many families with loved ones who died this year. Why? Because the estate tax repeal was accompanied by a limit on the step-up in basis, which could have caused many heirs to face significant income tax liability on the sale of the inherited assets. Still, for some families the step-up in basis is less of an issue than the estate tax.

GST tax

The generation-skipping transfer (GST) tax was also repealed for 2010, and the Tax Relief act brings it back for 2010 as well, with the same exemption amounts as the estate tax through 2012. However, the act sets the GST tax rate for 2010 at 0%. After 2010, the GST tax rate goes back up to 35% to match the top estate tax rate in 2011 and 2012.

Gift tax

The gift tax was never repealed for 2010, so the 2010 Tax Relief act provides no change to the gift tax regime for 2010. The exemption remains at $1 million and the top rate at 35%.

But, like the GST tax, the gift tax will follow the estate tax exemptions and top rates for 2011 and 2012.

Limited Step-Up in Basis for 2010

For anyone who dies in 2010, as mentioned above, the estate may choose one of two estate tax regimes under the 2010 Tax Relief act.

First some background on step-up in basis:

• Generally, the income tax basis of most inherited property is “stepped up” to its date-of-death fair market value. This means that recipients of the property can sell it immediately without triggering capital gains tax. Even if they hold on to it, they will pay less capital gains tax whenever they do sell it than they would have if the basis hadn’t been stepped up.
• Under the full estate tax repeal, the automatic step-up in basis is eliminated. Instead, estates can generally allocate only up to $1.3 million to increase the basis of certain assets plus up to $3 million to increase the assets inherited by a surviving spouse.

So, if the estate of someone who died in 2010 doesn’t exceed the new $5 million exemption (less any gift tax exemption used during life), then following option one above will likely be more beneficial: No estate tax will be due anyway, and the deceased’s heirs don’t have to worry about any limits on the step-up in basis.

If the estate exceeds the deceased’s available estate tax exemption, the decision becomes more complicated. Factors such as the extent of the possible estate tax liability, the extent to which assets have appreciated beyond the deceased’s basis and the extent to which the assets are going to a surviving spouse vs. other heirs will need to be considered.

Fortunately, the Tax Relief act does give families some time to make this decision. It extends the estate tax filing deadline for estates of those dying after Dec. 31, 2009, but before Dec. 17, 2010, generally to nine months after Dec. 17, 2010.

More flexibility for married couples

The 2010 Tax Relief act includes a provision that will (temporarily) provide significant estate planning flexibility to married couples. If one spouse dies in 2011 or 2012 and part (or all) of his or her estate tax exemption is unused at his or her death, the estate can elect to permit the surviving spouse to use the deceased spouse’s remaining estate tax exemption.

Similar results can be achieved by making asset transfers between spouses during life and/or setting up certain trusts at death. But making this election will be much simpler and provide flexibility if proper planning hasn’t been done before the first spouse’s death.

Still, this election is currently available for only two years unless Congress extends it. So married couples can’t depend on the election being available to ensure that they take full advantage of both spouses’ exemptions.

Also be aware that the provision doesn’t allow the deceased spouse’s remaining GST tax exemption to be used by the surviving spouse.

Charitable giving

Charitable giving is an important part of many people’s estate plans, and the 2010 Tax Relief act extends a couple of valuable charitable giving breaks through 2011:

1. Tax-free IRA distributions for charitable purposes. If you are over age 70½, you can make a direct contribution from your IRA to a qualified charitable organization without owing any income tax on the distribution. If you’re subject to required minimum distributions, the contribution can be used to satisfy that requirement. The maximum allowable distribution for charitable contribution purposes is $100,000 per tax year.
2. Contributions of capital gains real property for conservation purposes. You can make such a contribution and take a larger deduction than is allowed for most other capital gains property contributions. Specifically, your deduction for a contribution of capital gains real property for conservation purposes generally can be up to 50% of your adjusted gross income (AGI) rather than the 30% of AGI limit that normally applies to contributions of capital gains property.

Time to review your estate plan

With the many changes going into effect and the uncertainty about what will happen with the estate, GST and gift taxes in 2013, it’s critical to revisit your estate plan. If you don’t, the changes could result in your assets not being distributed according to your wishes or your family paying unnecessary taxes.

The law is complex and there are many contingencies to consider. We’d be pleased to work with you and your attorney to review your estate plan and update it as needed in light of the 2010 Tax Relief act.

The extension of the lower income and capital gains tax rates set to expire Dec. 31, along with significant reductions to the estate tax, has probably received the most media coverage. But the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, passed by the Senate Dec. 15 and the House Dec. 16, extends and expands a wide variety of valuable tax breaks.

Many of the breaks were set to expire after 2010 under the “sunset” provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 and have now been extended through 2012. Other breaks expired at the end of 2009 and have been extended only through 2011. But they’ll provide welcome relief for many taxpayers when they file their 2010 returns.

Finally, the 2010 Tax Relief act provides a few new tax breaks, most notably a payroll tax reduction for 2011.

Payroll tax rates

For 2011 only, the 2010 Tax Relief act reduces the employee portion of the Social Security tax on earned income from 6.2% to 4.2%. The self-employed pay both the employee and employer portions of Social Security tax, and the Tax Relief act also reduces their rate by two percentage points for 2011, from 12.4% to 10.4%.

For 2011, the maximum taxable wage base for Social Security taxes is $106,800 (the same as for 2010). So the maximum tax savings from this break is $2,136.

Ordinary income tax rates

Because of the 2001 tax act sunset, ordinary income tax rates (except for the 15% rate) were scheduled to increase for 2011. There was much talk about extending the lower rates for only the lower and middle tax brackets or for only one year, but the 2010 Tax Relief act extends the lower rates for all brackets for two years. Furthermore, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% of the 15% tax bracket for individual filiers (instead of dropping to 167%).  So income tax rate increases now aren’t scheduled to occur until 2013: 

Tip: If you’ve been planning to accelerate income into 2010 to take advantage of lower tax rates, such a step is no longer necessary. Rather, you may want to defer income to 2011 to defer the tax liability.

Long-term capital gains rates

Under the 2001 tax act, the 15% long-term capital gains rate was scheduled to increase to 20% in 2011. The 2010 Tax Relief act extends the 15% rate through 2012. If you have children or other loved ones in one of the bottom two ordinary income tax brackets, note that the 0% rate will generally apply to their long-term gains through 2012. (Beware of the “kiddie” tax, however.)

Tip: If you’ve been considering selling appreciated assets by year end to take advantage of the 15% rate, you now can hold off until 2011 or even 2012. Of course, if a sale will help you achieve other goals, you shouldn’t hesitate simply because there’s no longer a tax reason to sell this year.

Qualified dividend tax rates

The 2010 Tax Relief act extends taxation of qualified dividends at the 15% long-term capital gains tax rate through 2012 (0% for those in the bottom two brackets). Without Congressional action, dividends would have gone back to being taxed at ordinary income rates in 2011, with a top rate as high as 39.6%.

Tip: If you hold dividend-producing investments and have been considering whether you should make adjustments to your portfolio in light of their potentially higher tax cost, you no longer need to worry about making a decision before year end.

Tax-free IRA distributions to charity

The 2010 Tax Relief act extends the provision that permits taxpayers age 70 ½ or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year.  This provision is retroactively reinstated for 2010 and extended through 2011.  Furthermore, individuals will be allowed to treat IRA transfers to charities during January 2011 as if such distributions were made during 2010. 

Increased exclusion on small business stock gains

To make investing in certain small businesses more attractive, the Small Business Jobs Act of 2010 (SBJA), signed into law in September, temporarily increased the qualified small business (QSB) stock gain exclusion to 100% for stock acquired after Sept. 27, 2010, and before Jan. 1, 2011, that’s held for at least five years. Additionally, the SBJA eliminated the alternative minimum tax (AMT) preference item on such gain, making it tax free for AMT purposes as well. The 2010 Tax Relief act extends the acquisition deadline for 100% gain exclusion and elimination of the AMT preference item to Dec. 31, 2011.

Tip: QSB stock can help diversify your portfolio while providing additional potential tax benefits. So purchasing it by the end of 2011 may be worth considering. (To be a QSB, the company can’t hold gross assets exceeding $50 million at the time the stock is issued and must be engaged in an active trade or business.)

Itemized deduction and personal exemption phase-outs

The 2001 tax act reduced the adjusted gross income (AGI)-based reductions on itemized deductions and personal exemptions for 2006 through 2009 and eliminated them for 2010. The 2010 Tax Relief act extends this elimination through 2012.

Tip: If you’ve been planning to accelerate deductions into 2010 to take advantage of elimination of the phase-out, such a step is no longer necessary. However, accelerating deductible expenses into the current tax year is often a smart strategy, because it defers tax. So you may want to do so anyway. But beware of the AMT.

Deduction for state and local sales taxes

For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income tax rates or who purchase major items, such as a car or boat. But this break expired after 2009.

Now the 2010 Tax Relief act has extended it for 2010 and 2011 (but not for 2012).

Dependent care credit

The 2001 tax act increased the maximum amount of eligible expenses for the dependent care credit from $2,400 to $3,000 for one qualifying dependent and from $4,800 to $6,000 for more than one qualifying dependent through 2010. The 2010 Tax Relief act extends these higher limits through 2012.

The maximum credit is generally 20% of eligible expenses, which is $600 for one dependent and $1,200 for more than one dependent. There’s no upper AGI limit for claiming the credit, but taxpayers with AGIs of $43,000 or less are eligible for a larger maximum credit.

AMT

The AMT is a separate tax system that limits some deductions and credits, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Unlike the regular tax system, the AMT system isn’t regularly adjusted for inflation. Instead, Congress must legislate any adjustments. Typically, it has done so in the form of a “patch” — an increase in the AMT exemption. The 2010 Tax Relief act establishes patches for 2010 and 2011:

Note: Consult your tax advisor for AMT exemptions for children subject to the kiddie tax.

For 2010 and 2011, the Tax Relief act also allows you to offset your AMT liability with certain nonrefundable personal credits (such as the dependent care credit and certain energy-related credits) you’re otherwise eligible for.

An expansive act

We’ve been focusing on provisions that will help higher-income taxpayers to reduce their individual income tax liability. But the 2010 Tax Relief act provides many additional opportunities:

• If you have loved ones in the middle or lower tax brackets, they may benefit from extensions of breaks that you won’t qualify for, such as various education- and child-related credits and deductions.
• If you’re a business owner or executive, there are many business breaks that could reduce your business’s taxes (and your own, if you’re an owner of a flow-through entity).
• If estate taxes are a concern, you’ll want to review your estate plan in light of the Tax Relief act’s temporary estate tax relief.
• If you’re interested in reducing energy consumption, you may want to take advantage of extensions of various energy-related breaks.
• If you’re currently unemployed, you may benefit from the act’s extension of unemployment benefits.

If you’d like to learn more about any of these provisions and how they might affect your situation, please contact us. We’d be pleased to help you take full advantage of the opportunities the 2010 Tax Relief act offers.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, passed by the Senate Dec. 15 and the House Dec. 16, may be best known for extending lower income and capital gains tax rates for individuals. But the act also extends and enhances many breaks for businesses. In particular, it provides incentives for businesses to invest in assets, research and people.

Bonus depreciation

One way in which the 2010 Tax Relief act encourages businesses to invest is by significantly enhancing bonus depreciation. The act temporarily increases this additional first-year depreciation allowance to 100% and then provides a 50% allowance for 2012.

The Small Business Jobs Act (SBJA), signed into law in September, had previously extended 50% bonus depreciation to 2010. Here’s an overview of the bonus depreciation allowance:

Note: Later deadlines apply to certain long-lived and transportation property.

Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold improvement property.

The Tax Relief act also extends the provision allowing corporations to accelerate certain credits in lieu of claiming bonus depreciation for qualified assets placed in service through Dec. 31, 2012 (Dec. 31, 2013, for certain long-lived and transportation property).

Sec. 179 expensing

Section 179 is another tax law provision that encourages investment. It allows smaller businesses to immediately write off the full price of qualifying asset purchases rather than depreciating them over several years. The deduction is reduced by $1 for every $1 of expenses in excess of a phaseout threshold, which is why the break primarily benefits smaller businesses. The expensing election can be claimed only to offset net income, not to reduce net income below zero.

Before the 2010 Tax Relief act, the Section 179 expensing limit was scheduled to drop to $25,000 in 2012, with a phaseout threshold of $200,000. The act increases the 2012 limits to $125,000 and $500,000, respectively, and both amounts will be indexed for inflation.

It’s important to note, however, that these higher limits will be a significant drop from the 2010 and 2011 limits. Under the SBJA, the limits for assets placed in service in those years are $500,000 and $2 million, respectively.

Also, the Tax Relief act didn’t extend the SBJA provision that expanded the types of assets that qualify for expensing to include certain leasehold-improvement, restaurant and retail-improvement property. Under the SBJA, up to $250,000 of such property placed in service in 2010 or 2011 is eligible for Sec. 179 expensing.

Sec. 179 may be less important while 100% bonus depreciation is available. Depending on the type of asset, 100% bonus depreciation may provide the same tax savings — with no limit on asset purchases. But you’ll also want to consider state tax consequences.

Leasehold improvement, restaurant and retail-improvement property

For 2009, accelerated depreciation was available for qualified leasehold-improvement, restaurant and retail-improvement property. The 2010 Tax Relief act extends it to 2010 and 2011.

Specifically, the provision allows a shortened recovery period of 15 years — rather than 39 years — for such property.

Research credit

For many years, the research credit (also commonly referred to as the “research and development” or “research and experimentation” credit) has provided an incentive for businesses to invest in research. But the credit expired at the end of 2009.

The 2010 Tax Relief act extends the credit to 2010 and 2011. The credit is generally equal to a portion of qualified research expenses. It’s complicated to calculate, but the tax savings can be substantial.

Work Opportunity credit

The Work Opportunity credit, designed to encourage hiring from certain disadvantaged groups, was scheduled to expire after Aug. 31, 2011. The 2010 Tax Relief act extends the credit to qualifying hires made through Dec. 31, 2011.

Examples of disadvantaged groups for purposes of the credit include food stamp recipients, disabled or unemployed veterans, “disconnected” youth and ex-felons. The credit generally equals 40% of the first $6,000 of wages paid to qualifying employees ($12,000 for wages paid to qualified veterans).

Inventory donations

Enhanced deductions for certain inventory donations expired at the end of 2009:

• Food inventory,
• Book inventory to public schools, and
• Computer inventory for educational purposes.

The 2010 Tax Relief act extends the enhanced deductions for these donations through 2011. The rules are complex and vary somewhat for each type of inventory donation, so talk to your tax advisor to determine whether you’re eligible for an enhanced deduction.  

Transit benefits

Some fringe benefits aren’t included in an employee’s wages for income and payroll tax purposes, yet the employer is still allowed to deduct them. Until recently, the maximum transit benefit that could receive such treatment was higher for parking than for van-pooling and mass transit. Tax legislation in 2009, however, provided for the limits to be equal through 2010.

The 2010 Tax Relief act extends this parity through 2011. For 2010, the limit is $230 per month. As of this writing, the 2011 inflation adjustment hasn’t been released.

Payroll tax

For 2011 only, the 2010 Tax Relief act reduces the employee portion of the Social Security tax on earned income from 6.2% to 4.2%. The self-employed pay both the employee and employer portions of Social Security tax, and the act also reduces their rate by two percentage points for 2011, from 12.4% to 10.4%.

The employer portion of Social Security tax remains the same. But employers will have to work closely with their payroll companies to ensure the proper adjustments are made to their employees’ paychecks in the new year.

Also note that the Tax Relief act doesn’t extend the payroll tax forgiveness provided under the Hiring Incentives to Restore Employment (HIRE) Act of 2010. But remember that, if you hired workers in 2010 that qualified for payroll tax forgiveness, you may be eligible for a retention credit of up to $1,000 per retained worker on your 2011 tax return.

Many opportunities to save

The 2010 Tax Relief act also extends through 2011 many other breaks for businesses that had expired after 2009. These breaks are too limited in applicability to cover here, but they can provide significant benefits to the taxpayers that qualify for them.

And the Tax Relief act isn’t limited to tax breaks for businesses; it provides numerous additional tax-saving opportunities, including many that may help reduce your individual tax liability. If estate taxes are a concern, you’ll want to review your estate plan in light of the act’s temporary estate tax relief. Finally, if you’re interested in reducing energy consumption, you may want to take advantage of the act’s extensions of various energy-related breaks.

Please contact us with any questions you have about the 2010 Tax Relief act’s business incentives or other provisions. We can help you determine which ones will provide you opportunities to save taxes and achieve your goals.

Katz, Sapper & Miller and its consulting affiliate, KSM Consulting, will once again be partnering with TechPoint to host a unique series of quarterly events that will focus on the major technology issues that CEOs are facing during 2010.

Our next event will be held December 7 and is entitled "The Art of Convincing Brilliant People to Jump Off a Cliff." The roundtable will explore such topics as best practices in building an entrepreneurial team, talent management, and other critical personnel issues faced by Indiana CEOs, followed by Q&A and open forum discussion.

Panelists will include Marc Drizen of Employee Hold'em and Mark Barnhart of TouchPoint Recruiting Group.

This event is by invitation only. For more information about the KSM Executive Roundtable or to RSVP, please contact Jim Jay at jjay@techpoint.org, Kayla Garcia at kgarcia@techpoint.org, or call 317.275.2080.

Katz, Sapper & Miller and its consulting affiliate, KSM Consulting, will once again be partnering with TechPoint to host a unique series of quarterly events that will focus on the major business issues that high-tech CEOs are facing during 2010.

Our next event will be held on September 14 and is entitled "Board of Directors Development and Structure." Topics will include what a CEO should look for in a board, how a CEO should manage a board, and what a board member should do.

Panelists will include Scott Webber, chairman and CEO of Volatus Advisors, and Dave Lindsey, CEO and founder of Defender Direct, and the conversation will be moderated by Tim DuVall, a partner in the Life Sciences & Technology Services Group at Katz, Sapper & Miller, along with Charlie Brandt, managing director of KSM Consulting, and Jim Jay, president and CEO of TechPoint.

This event is by invitation only. For more information about the KSM Executive Roundtable or to RSVP, please contact Jim Jay at jjay@techpoint.org, Kayla Garcia at kgarcia@techpoint.org, or call 317.275.2080.

A new incentive in the recent healthcare legislation was established for companies that have invested in expenses related to therapeutic discovery projects. Applications will only be accepted only through July 21, 2010, so the time to act is now.

The credit or grant is for 50 percent of qualified expenses – up to a maximum of $5 million – for projects designed to:

• Treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials, and clinical studies, or carrying out research protocols;
• Diagnose diseases or conditions or to determine molecular factors related to diseases or conditions by developing molecular diagnostics; or
• Develop a product, process, or technology to further the delivery or administration of therapeutics.

Approval or denial will occur by October 29, 2010.

To learn more, contact Tim DuVall, partner in charge of Katz, Sapper & Miller’s Life Sciences & Technology Services Group.

Katz, Sapper & Miller, LLP
317.580.2042

Certified public accountants, appraisers and consultants are seeing physician practices being sold to hospitals with increasing frequency. If you’re considering selling your practice, here are the Top 5 considerations to have in mind before making your decision.

This article was excerpted from Physician’s Money Digest. For the full text, please click here.

Katz, Sapper & Miller, LLP, and KSM Business Technology, LLC, have partnered with TechPoint to present the KSM Executive Roundtable. TechPoint will be continuing this quarterly series throughout 2010, focusing on major issues hi-tech CEOs are facing. The series offers information that cannot be easily found elsewhere, in a format with a free exchange of ideas with other qualified technology CEOs. Previous topics of discussion have included capital access, tax and accounting, technology, and legal issues.

The next roundtable, to be held June 23, will be an interactive format designed for attendees to exchange ideas with peers. The format will allow the attendees to:

• Share the chief challenges and/or opportunities people are facing in today's marketplace
• Hear what colleagues are thinking about most as they lead their companies through the economic recovery
• Affirm, question or speak out against trends in industry sectors

Confirmed attendees include Mark Hill of Collina Ventures and TechPoint Board Chair, Christopher Clapp of ANGEL Learning, Chris Baggott of Compendium Blogware, and Mike Simmons of T2 Systems.

This event is by invitation only. For more information about the KSM Executive Roundtable or to RSVP, visit TechPoint's Web site.