Small Business Stock Exclusion for California Declared Unconstitutional

The Cutler case was a win for the taxpayers who filed the appeal, but is turning out to be a costly decision for all other small business stock owners.

The FTB has determined that because the California Court of Appeal held that R&TC §§18152.5 and 18038.5 (California’s small business stock provisions) are unconstitutional, they are now invalid and unenforceable. (FTB Notice 2012-03)

The FTB will deny the small business stock exclusion and deferral for 2012 and later years. They will also disallow exclusions claimed by taxpayers for years beginning on or after January 1, 2008. This means they expect taxpayers who benefited from a small business stock exclusion or deferral for a year beginning on or after January 1, 2008, to file an amended return, or they can expect a bill from the FTB.

Taxpayers who claimed the exclusion or deferral for years beginning before January 1, 2008, are not being asked to amend returns because the statute of limitations is close to expiring or has expired for most of these returns. If these taxpayers are involved in a pending audit or appeal, they may still be allowed the exclusion or deferral.

For the full text of the Notice, go to:  www.ftb.ca.gov/law/notices/2012/2012_03.pdf

A Comparison of the Tax Platforms of the Two Candidates

Table based on campaign platforms, legislative histories and

statements as of July 1, 2012
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Issue

2001 and 2003 "Bush" tax cuts
The tax cuts are scheduled to expire at the end of the year, which would:
• raise rates across the tax brackets, with the top rate going from 35% to 39.6%;
• reinstate phaseouts for personal exemptions and itemized deductions;
• repeal the enhanced child credit and other tax benefits; and
• raise the top rate on capital gains and dividends from 15% to 20% and 39.6%.

Romney

• Romney supports permanently extending all the tax cuts and further reducing rates as part of tax reform (see Tax Reform section below).

Obama

• Obama has called for a one-year extension of the tax cuts for most Americans while rolling back the tax cuts on income exceeding $200,000 for single filers and $250,000 for joint filers.
• In the past he has proposed permanently extending the tax cuts below those income thresholds, but in 2010 he agreed to extend the tax cuts for all income levels for two years in exchange for an extension of enhanced unemployment benefits and an individual payroll tax holiday, as well as other nontax items.

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Issue

Estate and gift taxes
New rules enacted in 2010 provide an estate and gift tax exemption of $5 million and a rate of 35%. Without legislation, these figures will revert to $1 million and 55% in 2013.

Romney

• Romney proposes full repeal of the estate tax.

Obama

• Obama has proposed to make permanent the 2009 transfer tax rules, which provided a top estate and gift tax rate of 45% and an exemption of $3.5 million.
• He agreed, however, to the 2010 compromise that set the estate and gift tax exemption at $5 million and the rate at 35%.

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Issue

Alternative minimum tax (AMT)
The AMT is not indexed for inflation, so exemption must be adjusted. The most recent AMT relief expired at the end of 2011.

Romney

• Romney proposes full repeal of the AMT.

Obama

• Obama signed legislation raising the exemptions levels in the annual AMT "patches" but has also proposed replacing the AMT with the new "Buffett Rule," which would impose a 30% effective tax rate on individuals with income of at least $1 million.

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Issue

Tax extenders
Many popular tax provisions, such as the research credit, expired at the end of 2011 and have not yet been extended.

Romney

• Romney has not specifically outlined his positions on most tax extenders but has said he supports enhancing the research credit and making it permanent.

Obama

• Obama has previously agreed to temporary extensions of the "extender" provisions, and his last budget proposal offered full retroactive extensions for 2011.
• He has proposed making the research credit permanent and increasing the alternative simplified credit rate from 14% to 17%.

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Issue

New tax incentives
After the financial crisis and economic downturn, lawmakers enacted many new tax incentives to boost the economy and provide taxpayer relief. Since then, they have not been able to agree on new tax incentives to support the recovery.

Romney

• Romney's tax platform focuses on rate reductions rather than targeted tax provisions. As governor, however, he did enact several targeted tax provisions, including:
  • an extension of the investment tax credit,
  • a biotech manufacturing tax credit, and
  • property tax relief for seniors.
• When the Massachusetts deficits turned into a surplus, he proposed lowering the state income tax rate from 5.3% to 5%.

Obama

• Obama has enacted many new tax incentives during his term, including:
  • the "making work pay" tax credit,
  • tax incentives for hiring unemployed workers,
  • an individual payroll tax holiday, and
  • 100% bonus depreciation.
• He currently supports extending 100% bonus depreciation and enacting a 10% credit for employer wage increases, up to a maximum of $500,000. For all the incentives he has proposed in his budget, see TLU 2012-02.

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Issue

Carried interest
The profits interest or "carried interest" in a partnership is generally taxed as capital gains, but many lawmakers support treating it as ordinary income.

Romney

• Romney said during his 2008 primary run that he supported retaining the current tax treatment of carried interest, but this year he has said only that the issue should be examined.

Obama

• Obama's budget proposals have repeatedly called for a change in the taxation of carried interest to make "investment services partnership interests" ordinary income.

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Issue

Deficit
The spending "sequestration" begins in 2013, when the "Bush" tax cuts expire. This "fiscal cliff" roughly coincides with when the debt limit will be reached. Lawmakers will debate whether to replace spending cuts and tax increases with other deficit reduction measures, and whether tax reform should play a role.

Romney

• Romney largely kept a promise not to raise taxes while facing a $2 billion deficit as governor, but he did raise some revenue with user fees and tax changes characterized as "loophole closing," including:
  • imposing income taxes on nonresidents selling real estate through partnerships,
  • expanding sales taxes to include downloaded software, and
  • adding penalties for underpayment of tax and activities related to tax shelters.
• Romney has signed the Americans for Tax Reform pledge not to raise taxes, a shift from his run for governor, when he declined to do so.

Obama

• Obama has consistently said revenue should be part of a deficit solution. During debt limit negotiations, he would not agree to entitlement reform without revenue increases.
• He has proposed raising revenue through tax reform and has also offered many revenue-raising provisions in his budgets, including:
  • repealing the last-in, first-out method of accounting;
  • repealing oil and gas incentives; and
  • changing worker classification rules.
• For a list of many more revenue proposals, see TLU 2012-02.

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Issue

Tax reform
Lawmakers are seriously discussing tax reform, and many want to use the "fiscal cliff" and the expiration of the "Bush" tax cuts as leverage. The tax reform blueprints from both Obama and Romney lack important details and do not fully explain how their revenue goals would be achieved.

Romney

• Romney supports lowering corporate and individual tax rates in exchange for repealing tax incentives, including:
  • lowering the corporate rate to 25%,
  • lowering the top individual rate to 28%,
  • retaining the 15% top rate on capital gains and dividends,
  • retaining the research credit, and
  • providing a 0% rate on interest, dividends and capital gains for taxpayers with income of less than $200,000.
• Romney has not explicitly identified the tax expenditures to be repealed in exchange.

Obama

• The president believes corporate reform can be achieved separate from individual reform. Obama's tax reform blueprint proposes:
  • lowering the corporate rate to 28%;
  • retaining the research credit;
  • retaining and increasing the Section 199 deduction, while narrowing its focus;
  • eliminating unidentified tax benefits to go with those identified in his budget; and
  • raising revenue through targeted limits on existing tax rules, including:
    • accelerated depreciation,
    • deductions for interest, and
    • the tax treatment of pass-throughs..

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Issue

International tax rules
The approach to taxation of offshore activities provides one of the starkest contrasts between Democrats and Republicans.

Romney

• Romney has said he supports shifting toward a "territorial tax system," in which offshore earnings are largely exempt from tax through a dividends-received deduction.

Obama

• The president's tax reform plan explicitly rejects a move to a territorial tax system. He instead proposes changes that would tighten international tax rules, including a new minimum tax on foreign earnings and proposals to limit the ability to place foreign income in low-tax countries. See TLU 2012-02 for the international proposals in the budget.

Employers Likely to Pay More Payroll Taxes in 2012

Many employers likely to pay more unemployment taxes in 2012

Employers in many states are likely to pay more unemployment tax in 2012 than in previous years for a variety of reasons, including: (1) a higher federal unemployment tax (FUTA) rate because of outstanding federal loans; (2) a higher state taxable wage base; and/or (3) a higher state unemployment tax rate and new surcharges.

Alaska. The amount of wages subject to unemployment tax (i.e., the taxable wage base) has increased from $34,600 to $35,800. Unemployment tax rates have also increased.

Arkansas. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Arkansas' failure to repay its outstanding federal unemployment insurance (UI) loans for two consecutive years. Employers now pay an advance interest tax to help the State pay the interest on its federal UI loans.

Arizona. Unemployment tax rates have increased. Employers must pay a special assessment to help the State pay the interest on its federal UI loans.

California. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of California's failure to repay its outstanding federal UI loans for two consecutive years.

Colorado. The taxable wage base has increased from $34,600 to $35,800.

Connecticut. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Connecticut's failure to repay its outstanding federal UI loans for two consecutive years.

Florida. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Florida's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $7,000 to $8,500. Unemployment tax rates have also increased.

Georgia. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Georgia's failure to repay its outstanding federal UI loans for two consecutive years.

Hawaii. The taxable wage base has increased from $34,200 to $38,800. Unemployment tax rates have also increased, but could possibly be reduced by 2012 legislation.

Idaho. The taxable wage base has increased from $33,300 to $34,100.

Illinois. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Illinois' failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $12,740 to $13,560. The maximum unemployment tax rate has increased. The fund building rate has also increased.

Indiana. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.6% higher than it otherwise would have been because of Indiana's failure to repay its outstanding federal UI loans for three consecutive years. Employers now also pay a solvency surcharge because of the outstanding federal loans.

Iowa. The taxable wage base has increased from $24,700 to $25,300.

Kansas. Unemployment tax rates have increased for employers with negative reserve balances.

Kentucky. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Kentucky's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $8,000 to $9,000.

Maine. Unemployment tax rates have increased.

Michigan. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.9% higher than it otherwise would have been because of Michigan's failure to repay its outstanding federal UI loans for four consecutive years. Michigan has now repaid the federal UI loans, so employers will not pay a higher federal unemployment tax (FUTA) rate on their 2012 federal return (due in 2013). The taxable wage base has increased from $9,000 to $9,500.

Minnesota. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Minnesota's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $27,000 to $28,000. The new employer rate has increased. The federal loan interest assessment rate has increased.

Missouri. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Missouri's failure to repay its outstanding federal UI loans for two consecutive years.

Montana. The taxable wage base has increased from $26,300 to $27,000.

Nevada. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Nevada's failure to repay its outstanding federal UI loans for two consecutive years. A new tax rate schedule went into effect on Jan. 1, 2012 that revised the reserve ratio ranges in the 18 tax rate classes. Employers will pay more unemployment tax in 2012 even if their UI benefit experience is similar to what it was in 2011.

New Hampshire. The taxable wage base has increased from $12,000 to $14,000.

New Jersey. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of New Jersey's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $29,600 to $30,300. Unemployment tax rates increased beginning with the fiscal year that began on July 1, 2011.

New Mexico. The taxable wage base has increased from $21,900 to $22,400. Unemployment tax rates have also increased.

New York. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of New York's failure to repay its outstanding federal UI loans for two consecutive years.

North Carolina. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of North Carolina's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $19,700 to $20,400.

North Dakota. The taxable wage base has increased from $25,500 to $27,900.

Ohio. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Ohio's failure to repay its outstanding federal UI loans for two consecutive years.

Oklahoma. The taxable wage base has increased from $18,600 to $19,100.

Oregon. The taxable wage base has increased from $32,300 to $33,000.

Pennsylvania. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Pennsylvania's failure to repay its outstanding federal UI loans for two consecutive years.

Rhode Island. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Rhode Island's failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $19,000 to $19,600 for most employers. It has increased to $21,100 for employers who are in the highest unemployment tax rate bracket.

South Carolina. The taxable wage base has increased from $10,000 to $12,000.

South Dakota. The taxable wage base has increased from $11,000 to $12,000.

Utah. The taxable wage base has increased from $28,600 to $29,500. Unemployment tax rates have also increased, but could possibly be reduced by 2012 legislation.

Vermont. The taxable wage base has increased from $13,000 to $16,000.

Virginia. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Virginia's failure to repay its outstanding federal UI loans for two consecutive years. Unemployment tax rates have also increased.

Virgin Islands. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of the Virgin Islands' failure to repay its outstanding federal UI loans for two consecutive years. The taxable wage base has increased from $22,600 to $23,700.

Washington. The taxable wage base has increased from $37,300 to $38,200.

Wisconsin. The tax rate on the 2011 federal unemployment tax return due on Jan. 31, 2012 will be 0.3% higher than it otherwise would have been because of Wisconsin's failure to repay its outstanding federal UI loans for two consecutive years.

Wyoming. The taxable wage base has increased from $22,300 to $23,000.

No 1099-MISC if Paid by Credit Card

In the instructions to Form 1099-MISC, the IRS has made it clear that payments made with a credit card, or through any third-party payer, are not reported on Form 1099-MISC. These amounts are now reported on Form 1099-K. Thus, if a business pays a service-provider with a credit card, debit card, gift card, or electronically via a service like PayPal, the payment is not included on a 1099-MISC.

Form 1099-K is new for 2011. The form is issued by a credit card company or other third-party payer (such as PayPal) to payees if the payee has more than 200 transactions and more than $20,000 of gross income paid to them. The 1099-K is not issued by either the buyer or seller.

Expiring Business and Individual Tax Provisions for 2011

Business Tax Provisions: According to a Congressional Research Service report dated 12/1/11, the following will expire on 12/31/11: (1) the research and development and the work opportunity tax credits; (2) the enhanced charitable deductions for contributions of food, books, and computer technology; (3) the special S corporation built-in gains tax suspension period; and (4) the 15-year recovery period for leasehold improvements, restaurant property, and retail improvements. Furthermore, the 100% bonus depreciation deduction will be scaled back to 50% in 2012, and the Section 179 deduction limit will fall from $500,000 this year to an inflation-adjusted $139,000 in 2012. 

Individual Tax Provisions: According to the same Congressional Research Service report, the following deductions will expire on 12/31/11: (1) elementary and secondary school teacher expenses, (2) state and local sales taxes, (3) mortgage insurance premiums, and (4) qualified tuition and related expenses. The 2010 Tax Relief Act allowed a taxpayer's nonrefundable personal credits to offset regular tax (net of any allowable foreign tax credit) and AMT for 2011, and also authorized a reduction in the employee's share of the Social Security payroll tax to 4.2% for 2011. Congress may extend the payroll tax break, and presumably will pass another (one year) AMT patch. Finally, the tax-free treatment of distributions from IRAs for charitable purposes will expire at the end of 2011. 

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IRS Issues Guidance for 2012 Milage Rate

The IRS has issued guidance (Notice 2012-01) providing the 2012 standard mileage rates for taxpayers to use in determining the deductible costs of operating a car for business, charitable, medical, or moving expense purposes.

The rate for the business use of an automobile is 55.5 cents per mile, the rate for the charitable use of an automobile is 14 cents per mile, and the rate for using an automobile for medical or moving purposes is 23 cents per mile. The guidance also provides the amount taxpayers must use in calculating a basis reduction for depreciation taken under the business standard mileage rate and provides the maximum standard automobile cost that may be used in calculating the allowance under a fixed and variable rate plan. The guidance is effective for applicable expenses, allowances, or reimbursements that are paid or incurred after December 31, 2011.

The IRS requested comments in previous guidance (Notice 2010-88) on whether taxpayers should be allowed to use the business standard mileage rate for cars used in fleet operations. After considering one comment, and in light of the limited number of comments, the IRS won't change the current limitation on fleet operations.