By: Heather I-D Graham, CPA, CVA

Drafting Buy-Sell Agreements requires that special consideration be given to a number of special rules that affect valuations for estate and gift tax purposed.  For example, options to acquire property at less than FMV and restrictions on the right to sell property are generally disregarded in determining value.  An independent valuation, or the assistance of a valuator in deriving a formula approximating FMV at the date of the agreement helps insure the proper tax result of the Buy-Sell agreement.  Buy-Sell Agreements also have numerous other non-tax issues, all of which can be enhanced by a proper valuation formula.

The business valuation formula can be different or each business, depending on the industry, risks, and case circumstances.  If you need professional assistance, pelase give us a call.

Written by: Keith Frame, CPA

We haven’t talked much about it. We have not yet done much planning in consideration of it. I think most of us CPAs believed it would never come to be (and still don’t in some cases). But the year 2013 is set to usher in a wave of tax increases that will cost all taxpayers dearly.

Not only do the temporary Bush tax cuts disappear, but new taxes appear to fund Obamacare. A brief rundown of changes affecting individual taxpayers is as follows:

• Tax rates increase across the board with the top marginal rate rising from 35% to 39.6%
• Capital gains tax rates rise from 15% to 20%
• Tax rates on dividends increase from 15% to your marginal income tax rate which could be as high as 39.6%
• Reduction of the child tax credit from $1,000 to $500
• A new .9% hospital insurance tax on wages in excess of $250,000 for married taxpayers filing a joint return ($200,000 for single taxpayers)
• A new 3.8% tax on net investment income for married taxpayers with income in excess of $250,000 ($200,000 for single taxpayers). Net investment income includes interest, dividends, capital gains and rental income

 There are several strategies that should be considered as we get closer to the year 2013:

•  Arrange to receive income in 2012 instead of 2013 if possible
• Sell profitable investments this year – if  you are considering the sale of an asset with a significant capital gain, selling in 2012 will result in a capital gain rate of no more than 15% plus avoiding the 3.8% tax on investment income
• Reduce exposure to taxable dividends – it might make sense to include dividend paying stocks in tax-deferred accounts and purchase growth stocks and tax exempt bonds in taxable accounts
• Distributions from tax-deferred accounts are not included in investment income so this gives taxpayers an additional incentive to maximize retirement plan contributions

Taxes will be THE hot topic during this year’s presidential election. We don’t expect to see much action on these issues prior to the election as the candidates weave and dodge on their real positions.

The effect of these increased taxes on the economy in general, the housing market and the stock market will not be a positive one. The outcome of the election and the last month of this year will dictate planning decisions for many of our clients.

Written by: Scot Smith, CPA

NEW MICHIGAN CORPORATE INCOME TAX (CIT) EFFECTIVE JANUARY 1, 2012

With the new Michigan Corporate Income Tax replacing the old Michigan Business Tax effective January 1, 2012 we want to inform you of a new law regarding flow-through income tax withholding responsibilities:

Michigan based partnerships, “S” corporations and Limited Liability Companies (also known as flow-through entities) are now required to withhold and pay Michigan corporate income tax on a quarterly basis at a rate of 6%, if:

• The partner, shareholder or member (K-1 recipient) is a “C” corporation, and
• The business income of the flow-through entity is over $200,000.

Michigan business income is Federal taxable income adding back bonus depreciation and the domestic production activities deduction, if any. Withholding and payment of income taxes is required quarterly based on the K-1 recipients’ distributive share of income, using Form 4917. In addition, the withholding requirement only applies to Michigan-based sales, so a proration will be necessary if there are sales in other states.

If the flow-through entity has K-1 recipients who are also flow-through entities, it must be determined who the ultimate taxpayer is to determine if there should be Michigan corporate income tax withheld at 6% or Michigan individual income tax withheld at 4.35%.

OLD LAW REGARDING NON-RESIDENT MICHIGAN WITHHOLDING

If the K-1 recipient is a Michigan non-resident individual, the flow-through entity is required to withhold and remit Michigan income tax at a rate of 4.35% on their distributive share of income regardless of the amount of the flow-through entity’s business income.

In addition to the quarterly forms and remittances noted above (Form 4917), Form 4918, Annual Withholding Reconciliation Return is due by February 28th.

Written by: Lisa Whyte, CPA

If you use QuickBooks, you understand that we use your data to prepare your tax return.  You may not realize that we don’t simply take your numbers and use them as is.  We typically verify the accuracy of your accounts. 

We frequently need to make some adjustments to correct your QuickBooks balances.   If our adjustments are not entered in your QuickBooks file, then your balances will remain incorrect.    If you have received adjustments from your accountant for your 2011 tax return, please be sure to enter them.   I personally prefer to use (when possible) the QuickBooks Accountant’s Copy because it allows clients to simply import our adjustments into their file.

Please review the adjustments that your accountant gives you.  Some adjustments, such as recording depreciation, we expect to do every year.  Other adjustments, such as reclassifying an expense, may signal that transactions have been improperly recorded.  Discuss these adjustments with your accountant; they may need you to start recording transactions in a different manner.

After you have entered our adjustments, discussed with your CPA what transactions need to be recorded differently, and followed these recommendations your QuickBooks reports will be more accurate.

Written by: Annette Clark, CPA

You may be eligible for a Michigan Unemployment Tax Credit.

To determine if you are eligible for the Michigan Unemployment Tax Credit you need to locate your “actual reserve” balance as of June 30, 2010 as shown on your 2011 Michigan Unemployment Annual Tax Rate Determination.   If this balance is positive you are eligible for the credit. 

Complete form UIA 1110 which is available at: http://www.michigan.gov/uia/  Just type in UIA 1110 2012 in the search field, choose the top item and scroll down to you get to the correct form.  All you need is your Unemployment Insurance Agency account number and Michigan wages as reported on your 2011 IRS Form 940 Schedule A.  Remove the bottom portion of the form and mail to the address at the top of the form. 

The bottom half of the form is not required for you to receive the credit, but for you to verify the amount the State credits your account for.  Once the form is processed by the State, a credit will show up on your quarterly preprinted UIA 1020 form.

If Robert F. Murray & Company prepares your quarterly payroll tax returns we will prepare this form for you if you are eligible. We ask that you provide us with the preprinted quarterly UIA 1020 forms when received so that we can utilize the credit when it becomes available.

If you have any questions or need assistance in the preparation of this form please let us know, we’d be happy to assist you.

Written by: Michael P. Riley, CPA
Worker classification cases have been a bone of contention for the IRS for many decades and still are.  Businesses that hire workers as independent contractors save money on federal and state employment taxes.  Determining whether a worker should be treated as an employee or as an independent contractor depends upon a “facts-and-circumstances” test revolving around a common-law test to whether the service recipient has the right to DIRECT AND CONTROL how the worker performs the services provided.

In September of 2011, the IRS issued Announcement 2011-64 establishing a new voluntary classification program (VCSP).  This program will provide partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat workers as employees.

Under the VCSP, taxpayers may voluntarily reclassify workers as employees for federal income tax purposes.  To become eligible for the VCSP the taxpayer must:

• Have filed all required Form 1099’s for the workers for the past three years.
•  Not currently be under audit by the IRS, the DOL or a state agency concerning worker classification issues.

 If the taxpayer or entity is interested in applying for the VCSP, the taxpayer should complete Form 8952 at least sixty (60) days before it wants to start treating the workers as employees.  Taxpayers accepted into the VCSP will pay an amount that equates to 10% of the employment tax liability due on compensation paid to the reclassified workers for the past year.

In addition, in September of 2011, the Department of Labor and Hour Division will now share information or data with the IRS related to DOL investigations involving employment tax compliance.  In return, the IRS will evaluate these referrals provided by the DOL and share that information with State and Local Taxing agencies.

 For more information regarding worker classification issues please contact one of our professionals at Robert F Murray and Company.

Written By: Tina Powell, CPA

Most of you may have heard that there is a new tax in town.    Effective January 1, 2012, the Michigan Corporate Income Tax (CIT) replaces the unpopular Michigan Business Tax (MBT.)  It is estimated that it will relieve 95,000 Michigan businesses from the burden of filing a business return and paying business taxes.

The CIT applies only to C corporations and entities taxed as C corporations for federal income tax purpose (for example, a limited liability company that checks-the-box to be taxed as a corporation.)  A C corporation will be exempt from the CIT if its Michigan annual gross receipts are less than $350,000 or its CIT liability is less than $100.  C corporations with an ownership or beneficial interest in a flow-through entity with Michigan nexus will also be subject to the CIT.

For those of you who do business in multiple states, gross receipts will be apportioned based on the ratio of Michigan sales to total sales.

The CIT is equal to 6% of the federal taxable income subject to specified additions and subtractions.

Since the CIT will apply only to C corporations, businesses that are taxed as C corporations may want to consider converting to an S corporation or another type of “pass-through” entity.  This conversion could help reduce the business’s effective income tax rate, and it might also help to reduce the owner’s payroll or self-employment taxes.  However, several tax and business issues should be considered before pursuing such a conversion.

A downside to the CIT is that all of the tax credits and deductions that were available under the MBT are no longer available.  One exception is the small business alternative tax credit.  The credit will allow qualified small businesses to pay tax at a rate of 1.8% of adjusted business income instead of 6%.  This credit will be available to C corporations with gross receipts of less than $20 million and adjusted business income of $1.3 million or less, and officers’ and owners’ compensation that does not exceed $180,000 per individual.  The credit will be subject to phase-out for gross receipts between $19 million and $20 million and officers’ and owners’ compensation between $160,000 and $180,000 per individual.

Another downside is that there are no provisions for the use of net operating losses incurred during years that the MBT was in effect (2008-2011.)

The MBT is gone, or is it?  Actually, some businesses may have select credits available under the MBT and if they elect, they may continue to file under the MBT, rather than the CIT.  But beware, if you were filing as a unitary group, and if one member of the group elects to continue to file under the MBT, ALL members must continue to file under the MBT.  Additionally, the CIT retains unitary filing requirements for C corporations under common control.  Unitary groups are required to file a combined return.

Fiscal-year taxpayers will have a short year for both 2011 and 2012.  A fiscal-year taxpayer will likely be allowed to file its first return on April 30, 2013, the same as a calendar-year taxpayer.

No change is required in your current payroll software for FICA withholding.  As we noted in a previous correspondence the FICA rate was to return to 6.2% for employee withholding on March 1^st unless congress did something.  They did, the rate reduction is extended till 12-31-12.  Official release is below.

 Payroll Tax Cut Extended to the End of 2012; Revised Payroll Tax Form Now Available to Employers

IR-2012-27, Feb. 23, 2012

WASHINGTON – The Internal Revenue Service today released revised Form 941 enabling employers to properly report the newly-extended payroll tax cut benefiting nearly 160 million workers.

Under the Middle Class Tax Relief and Job Creation Act of 2012, enacted February 22, 2012, workers will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2 percent, which is two percentage points less than the 6.2 percent rate in effect prior to 2011.  The reduced rate, originally in effect for all of 2011, was extended through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011, enacted December 23, 2011.

Self-employed individuals will also benefit from a comparable rate reduction in the social security portion of the self-employment tax from 12.4% to 10.4%.  For 2012, the social security tax applies to the first $110,100 of wages and net self-employment income received by an individual.

The new law also repeals the two-percent recapture tax included in the December legislation that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut.  As a result, the now repealed recapture tax does not apply.  The IRS will issue additional guidance, as needed, to implement the newly-extended payroll tax cut, and any further updates will be posted on IRS.gov.

Written by: Keith O. Frame, CPA

It seems I continually still see newspaper articles, editorials and letters to the editor in various publications referring to the Michigan tax overhaul as a “$1.8 billion dollar give-a-way to business”. Let’s investigate this claim.

If you work in Michigan as an employee of a business in Michigan, you pay State of Michigan income tax on your wages. It doesn’t matter if you make minimum wage or $1,000,000 per year, you pay tax at the statutory rate on the Michigan Form MI-1040 (currently 4.35%).

However, if you start your own business, grow it into a success, hire others and otherwise prosper, you have had the privilege of paying extra tax to the State of Michigan. The Michigan Business Tax (MBT) is (was) calculated in two different ways, generally applying a more favorable calculation to smaller businesses, but having an absolute cliff for larger or more profitable businesses where the tax liability, depending on several factors, could increase exponentially for a small increase in income. The more favorable calculation is a 1.8% tax on the taxable income of the business plus all wages and benefits paid on behalf of the owner and his family members.

Here is where businesses have been getting double taxed for years: most small businesses are organized as pass-through entities (S corporations, partnerships, LLC’s). These entities pay no tax at the federal level – their income is passed through and taxed on the tax returns of their owners. This treatment at the federal level has effectively been ignored in Michigan. These businesses still had to prepare an MBT return and pay any applicable tax.  

These pass-through entities prepare their federal tax return, passing the income through to their owners who include it on their federal tax returns. These same owners prepare their Michigan MI-1040 by starting with Adjusted Gross Income on their federal return which, of course, includes the income from the pass-through entity.

So, the unsuspecting business owner, perhaps in the same economic circumstances of someone in a similar field working as an employee for someone else, has had the privilege of paying a significantly higher tax rate. Two taxes on the same income – seems like that should be unconstitutional!

The tax overhaul eliminates the filing requirement for most pass-through entities and no longer results in double taxation in the State of Michigan. Only C corporations are subject to the new corporate income tax – all pass-through entities and individuals will pay tax at the Michigan individual income tax rate only. This creates basic fairness in the tax system that has not existed for 35 years.

Michigan has recently vaulted from near the bottom to near the top of best places to do business in the U.S. as a result of these changes according to the Tax Foundation. This is obviously great news for the State and will ultimately result in more revenue flowing into the State Treasury.

Basic economics still rule – if you want more of something – tax it less.

Written by: Heather Graham, CPA, CVA

Changes to the Michigan Employment Security Act, Effective for 2012

On December 19, 2011 the State of Michigan made several changes to the Michigan Employment Security Act. 

• The State issued $3.323 billion in revenue bonds and retired the debt due to the federal government for funds used to pay Michigan unemployment benefits.  The bonds are scheduled for a 10 year repayment.
• The repayment of the debt to the federal government will remove the credit reduction tax from the Federal Unemployment Tax computation. (Previously this was expected to be 1.2% on the first $7,000 of each employee’s wages.)
• Michigan unemployment wage base has been increased from $9,000 per employee to $9,500 for 2012.  The $9,500 wage base will continue until the Unemployment Insurance Trust Fund reaches a positive balance of $2.5 billion.
• There is a new component to the Michigan Unemployment Tax Rate Determination this year.  It is called the Obligation Assessment (OA).  The OA will be applied to all contributing employers until the revenue bonds are repaid.  According to the Department of Licensing and Regulatory Affairs, “the OA is structured to incorporate your experience rate and a base assessment of $42 per employee for 2012, and is currently estimated to be $63 per employee for 2013 and beyond.”  At this time, we have not yet seen this “calculation”.

It will be very important that you provide your payroll preparer with a copy of your annual Tax Rate Determination.  It is expected that your new state unemployment rate will be significantly higher than last year.