Pub. 1 2012 Issue 7

Oct/Nov 2012 19 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s A S WITH EVERY YEAR, BANKS SHOULD ENGAGE in some form of tax planning and forecasting to ensure the impact of recent law changes and differences be- tween financial statements and taxable income are fully understood. However, as a result of the “fiscal cliff,” new regulations and new taxes, the 2012/2013 tax planning will likely be more in-depth and time consuming. To emphasize this point, some of the most impactful changes are listed below and should be considered when performing your tax planning this year. 2012 New Regulations While a full discussion of the new regulations related to what is com- monly referred to as the “Repair Regulations” is outside the scope of this article, Banks should be aware that the IRS issued these regulations to clarify and expand the standards for capitalization of specific expenses associated with tangible property. More relevant to Banks, effective January 1, 2012, the regulations change the following: • The definition of what constitutes a unit of property is changed • The framework in analyzing whether an expenditure to repair a unit of property should be capitalized is changed • Banks generally must capitalize amounts paid to acquire a unit of real or personal property • Banks should be able to elect the De Minimis method which allows a deduction for purchases limited to the greater of .1% of gross receipts or 2% of depreciation and amortization • The asset disposition rules to allow loss recognition on the disposition of structural components of a building have changed As these extensive regulations impact almost all entities, the IRS is anticipating that most business taxpayers will need to file a change in accounting methods (Form 3115) to conform to the new regulations. 2012 and 2013 Tax Depreciation For the last few tax years, Banks have been entitled to 100% bonus depreciation on qualifying property. Generally, qualifying property included new assets with a tax useful life of 20 years or less and was not pursuant to a contract entered into before September 10, 2010. In addition to bonus depreciation, the thresholds for expensing assets under Section 179 were inflated for the last several tax years. In 2011, a taxpayer was allowed to expense up to $500,000 under Section 179. Under the current law, the following apply to bonus depreciation and Section 179 for 2012 and 2013: • Bonus Depreciation for 2012 and 2013 is 50% and 0%, respectively • Section 179 expensing for 2012 and 2013 is $139,000 and $25,000, respectively Banks will likely see a significant change to taxable income as these provisions expire. As a vast majority of assets added for the last few years have been fully depreciated for tax purposes, there is little tax deprecia- tion to take in the current year when compared to book depreciation on these same assets. 2013 Medicare Tax One of many significant provisions of the Patient Protection and Affordable Care Act of 2010 is a tax provision that, effective 2013, imposes a Medicare tax of 3.8 percent on the lesser of net investment income or the excess of an individual’s modified adjusted gross income (MAGI) more than $200,000 ($250,000 for joint returns). Investment income would include items such as interest, dividends, rents, royalties, gains on sales of certain property and ordinary income from passive activities. Investment income is reduced by deductions properly allo- cated to such income. With the information above in mind, flow through income from entities such as S-Corporation Banks will have additional tax consequences. The tax consequences are different for individuals who are considered active versus passive. Impact on Active Bank S-Corp Shareholders As discussed above, if a taxpayer’s MAGI exceeds the above men - tioned limitation, an individual will pay the Medicare tax on the lesser of net investment income or the excess of an individual’s MAGI. An individual’s income that is received from a flow through entity such as an S-Corporation Bank maintains its character. For example, the income earned by the Bank in the ordinary course of its trade or business (ie. interest from loans and/or securities) will be taxed as ordinary income and not subject to the additional Medicare tax on the active shareholder’s individual tax return. However, the investment income earned by the Bank will be subject to the new Medicare tax. Impact on Passive Bank S-Corp Shareholders Code Section 469 is used to determine whether or not an individual is considered to materially participate in an activity. Probably the most applicable Section 469 test to shareholders of a Bank is 500 hours of par - ticipation. If a taxpayer does not materially participate in an S-Corporation Bank, all of the income passed through from the Bank will be subject to the additional Medicare tax regardless of the character. Unlike the active shareholder, the ordinary income passed through from the Bank would not only be subject to an individual’s ordinary Federal income tax rates (currently projected to be 39.6% in 2011), but would also be subject to the new Medicare tax. 2012/2013 TAX YEAR-END PLANNING By BrianMall, CPA with BKD, LLP continued on page 23