August 10, 2012
By Alan L. Olsen, MBA, CPA (tax)
Greenstein, Rogoff, Olsen and Co., LLP
On June 28, 2012, the U.S. Supreme Court upheld the Patient Protection and Affordable Care Act (PPACA) – also referred to informally as “Obamacare” — as a tax. What is the impact of this ruling on current tax law, and how will it affect your family or small business?
The PPACA contains 20 new taxes or increases to existing taxes. Combined, these taxes are estimated to collect an additional US$500 billion in tax revenue, and represent one of the largest tax increases in our nation’s history.
Why haven’t we noticed this huge tax increase? Tax increases under the PPACA are being implemented over several years, from 2010 to 2018. Following is a summary of the tax changes.
Taxes that went into effect in 2010:
• Excise Tax on Charitable Hospitals: This is a $50,000 excise tax that charitable hospitals must pay unless they meet new standards in assessing community health needs and financial assistance requirements, as set by the U.S. Department of Health and Human Services (HHS).
• Codification of the “Economic Substance Doctrine”: A $4.5 billion tax increase, this provision allows the Internal Revenue Service (IRS) to disallow completely legal tax deductions and other legal tax-minimizing plans if the agency deems the action lacks substance and is merely intended to reduce taxes owed.
• “Black Liquor” Tax: This is a tax on a type of biofuel, and represents an increase of $23.6 billion.
• Tax on Innovator Drug Companies: This is a $2.3 billion annual tax on the pharmaceutical industry, imposed relative to share of sales made that year. It is a tax increase of $22.2 billion.
• Blue Cross/Blue Shield Tax Hike: The tax deduction available to Blue Cross/Blue Shield companies will be allowed only if at least 85 percent of premium revenues are spent on clinical services. This equates to a $400 million tax increase.
• Tax on Indoor Tanning Services: This is a new excise tax of 10 percent on the use of indoor tanning salons – a $2.7 billion tax increase.
Taxes that went into effect in 2011:
• Medicine Cabinet Tax: With the implementation of this tax, which translates to a tax change of $5 billion, money from Health Savings Accounts (HSA), Flexible Spending Accounts (FSA) and Health Reimbursement Arrangements (HRA) can no longer be used to purchase nonprescription, over-the-counter drugs.
• HSA Withdrawal Tax. This is a tax increase on non-medical early withdrawals from an HSA (from 10 percent to 20 percent), and represents a $1.4 billion tax change.
Mandate that went into effect in 2012:
• Employer Reporting of Insurance on a W-2: Employers must now report to employees (and to the IRS) the cost of their employer-sponsored group health plan coverage. This is likely to open the door for an IRS audit.
Taxes that will go into effect in 2013:
• Investment Income Surtax: This is a new 3.8 percent surtax on investment income for households making at least $250,000 (or $200,000 single); this will be a $123 billion tax increase.
• Medicare Payroll Tax Increase: Income in excess of $200,000 (or $250,000 married) will be taxed at an increase of 0.9 percent – an $86.8 billion tax change.
• Tax on Medical Device Manufacturers: This measure adds a 2.3 percent excise tax on manufacturers of medical devices, and will equate to a $20 billion tax increase.
• Limit Raised on Medical Tax Deductions: Currently, people facing high medical expenses are allowed a tax break on the amount over 7.5 percent of their adjusted gross income when they itemize deductions. This tax – which will represent a $15.2 billion tax increase – will raise the threshold to 10 percent.
• Flexible Spending Account Cap: This imposes a cap of $2,500 on the currently unlimited FSA deduction. The effects of the cap are likely to be a hardship on families who use FSA accounts to pay for the tuition of their children with special needs. Under current tax law, FSA accounts can be used to pay for special needs education, which can cost in excess of $12,000 per year. Overall, the Flexible Spending Account Cap translates to a tax change of $13 billion.
• Medicare Prescription Drugs: Tax deductions available to employers that provided retirement prescription drug coverage in coordination with Medicare Part D will be eliminated; this will represent a $4.5 billion tax increase.
• Limit on Executive Compensation for Health Insurance: A $600 million tax increase, this measure imposes a $500,000 annual limit for Executive Health Insurance Compensation.
Taxes that will go into effect in 2014:
• Health Insurance Excise Tax: This is an excise tax on individuals who do not purchase “qualifying” health insurance. Exemptions for undocumented immigrants, religious objectors, prisoners, individuals earning below the poverty line, members of Indian tribes and hardship cases will be determined by the HHS.
• Employer Mandate Tax: Companies with more than 50 employees that do not offer health coverage, and that have at least one employee who qualifies for a health tax credit, will have to pay a non-deductible $2,000 tax per full-time employee.
• Tax on Health Insurers: This is an annual health insurance tax (HIT) imposed on the fully-insured industry. The stipulation gradually phases in until 2018. Firms that receive $50 million in profit have the tax fully imposed upon them; this is a $60.1 billion tax increase.
Tax that will go into effect in 2018:
• Excise Tax on Comprehensive Health Insurance Plan: A tax increase of $32 billion, this is a 40 percent excise tax on “Cadillac” health insurance plans ($10,200 single/$27,500 family). Early retirees and high-risk professions are allowed a high threshold of $11,500 single/$29,450 family.
Alan L. Olsen is Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading CPA firm in the San Francisco Bay Area. With more than 25 years of experience in public accounting, Alan works with some of the most successful venture capitalists in the world, developing innovative financial strategies for individuals and businesses. Olsen is also host of KDOW 1220AM’s radio show Alan Olsen’s American Dreams.
November 18, 2011
November 16, 2011
October 18, 2011
By Alan L. Olsen, CPA, MBA (tax)
Greenstein Rogoff Olsen & Co. LLP
Recently a 1936 Bugatti sold for over $30 million. Granted, that’s the world’s most expensive car, and one of only three ever built, but it raises an important financial question for car collectors.
While acquiring beautifully restored antique cars may be someone’s high-octane passion, the IRS could see that “hobby” as a business, thereby changing a person’s tax status.
As with many items within a wide range of expensive collectibles, those interested in classic cars and racecars often claim the reasons for their purchases are varied but most often include personal pleasure and recreation, increasing asset value and even short-term market movement, or business profit.
In terms of tax treatments, the distinction between collectors, investors and dealers is of great importance. Between collectors and investors, the tax rule is generally more favorable to the investors. Whereas, being a vehicle dealer may create unique tax advantages.
A collector is considered someone who buys and sells vehicles for personal pleasure and/or recreation. An investor is seeking profit from appreciation of a vehicle’s value. A dealer is pursuing business profit by selling vehicles to his or her customers.
The tax rate on long-term (collection held for more than one year) collectible capital gain is 28%, whether you are a collector or investor. With regard to capital loss, investors are allowed to deduct the loss in the current year as long as they have enough capital gain to offset such loss. Otherwise, the loss in excess of $3,000 is carried forward to offset future years’ capital gains.
In contrast, a collector’s capital loss is disallowed. For both collectors and investors, the deduction of collecting expenses (e.g., appraisal fee, maintenance expense, etc.) is treated as miscellaneous itemized deductions, subject to the 2% AGI (adjusted gross income) limitation. Additionally, the unfavorable Hobby Rule may apply to collectors, thereby only allowing them to deduct the expenses to the extent of their hobby income.
With this in mind, consider establishing a vehicle dealership if you are doing substantial and frequent purchases and sales. The disadvantage is that your net income is subject to the ordinary income tax rate. The current highest rate is 35%, 7% higher than collectible capital gain rate. However, more tax advantages may result from sales tax savings such as full deduction of ordinary losses and escape from passive loss limitation.
Tremendous sales tax is imposed on valuable antique cars and racecars. A dealer is not required to pay sales tax on vehicle acquisition if they purchase the car as inventory with intent to resell. If the vehicle is sold at retail to an end user, sale tax will apply. (You may need to be very careful about the more stringent use of the tax rule governed by the California Board of Equalization).
A vehicle dealership is considered ordinary trade or business. Its business-related expenses are completely deductible if they are ordinary, necessary and reasonable. Even if the expenses exceed the sale receipts, the excess is allowed to offset income from other activities, even investment activities (e.g., capital gains) or treated as a net operating loss (NOL) to carry back and forward.
Although the risk of an IRS “Hobby Loss” challenge is low, you may still need to pay attention, to not raise red flags. The key point is that you should keep adequate records to substantiate your “for-profit” purpose and reasonable regularity and continuity of your trade or business.
Furthermore, you should avoid the Passive Loss Rule kicking in which could suspend your loss deduction. This requires that you physically participate in the operation and management of your dealership business. As an alternative, properly using the Passive-Activity-Grouping Rule may help you escape the passive loss limitation for both a vehicle dealership and other business activities even though you are not a material participant. You will have a chance to apply exceptions to the passive rule to circumvent undesirable passive loss suspension.
When acquiring antique or classic cars, you have choices, each with pros and cons. It’s highly recommended you consult with a tax advisor for tax implications before any critical decisions are made.
Alan L. Olsen is Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading CPA firm in the San Francisco Bay Area. With more than 25 years of experience in public accounting, Alan works with some of the most successful venture capitalists in the world, developing innovative financial strategies for individuals and businesses. Olsen is also host of KDOW’s American Dreams: Keys to Life’s Success Radio Show.
April 8, 2011
April 5, 2011
April 4, 2011
March 15, 2011
March 2, 2011
February 9, 2011
By Alan L. Olsen, CPA, MBA (tax)Managing Partner
Greenstein Rogoff Olsen & Co. LLP
Tax season is here and the deadline for filing your tax returns is nearing. If you are not sure where to start, these five steps may help as you prepare to send your tax returns to the IRS and state authorities.
1. Get Organized
You should review all financial activities throughout the year and collect any applicable documents that you will need to file your tax returns. Consider if you have sold stock, purchased online products without paying tax, re-located due to a change in employment, etc. These are all items that you will need to record on your tax return.
As the W-2s and 1099s start coming in, store them in a file with the rest of your tax documents. Organization is a key component to making tax filing less stressful.
If you have your own business, organize all your receipts and expense journal from the previous year.
2. Prepare Your Tax Returns
After you have organized all of your tax documents and financial information from the previous year, you are ready to prepare your tax returns. Consider your options: You can prepare the tax returns yourself using tax software, or you can hire a paid preparer. IRS Statistics showed that last year, over 34 million e-filed tax returns were self-prepared. Be aware that self-prepared returns have an increased chance for error. If using a tax preparer, make sure they have all your tax documents early, otherwise, you may have to file an extension.
3. Did you take all of your deductions and credits?
To maximize your refund, review all of the credits and deductions that you can take. A CPA can help you learn more about deductions/credits that you are eligible for, but consider some of the following:
• First-Time Homebuyer Credit
• Child Tax Credit
• Earned Income Credit
• American Opportunity Credit
• Educator Expense Deduction
4. Double Check your Return
Are you ready to submit your tax return? Carefully review your tax return to ensure that there aren’t any mistakes that will delay your refund.
• Did you sign and date your tax return?
• Do you have the correct social security number on your tax return?
• Is your filing status correct?
• Did you use the correct forms/schedules?
• Did you claim eligible dependents?
• Did you report all of your income even if it is not on a W-2 or 1099?
• Do you need to pay and/or report payroll tax?
5. File Your Tax Return
As you prepare to submit your tax return to the IRS, consider your options. You can e-file or paper file your tax return. The turn-a-round time for refunds is much quicker with e-filing, but the IRS still accepts paper-filed returns.
For more information on filing your tax return this year, contact us at 866-CPA-2006 or at www.groco.com.
Alan L. Olsen is Managing Partner, Greenstein, Rogoff Olsen & Co. LLP, CPAs. Alan is a former IRS auditor who now specializes in tax preparation and consulting for high-net-worth individuals. He has successfully represented some of the most successful entrepreneurs in the world in IRS audits. Read more at www.GROCO.com.