Tax Effects: what does 2014 have in store for business owners PRESENTED BY John woodrich, CPA, CGMA jwoodrich@CARLSON-ADVISORS.COM 763-971-4833 CARLSON ADVISORS 7101 NORTHLAND CIRCLE, SUITE 123 Minneapolis, MN 55428

Table of contents 2013 Year in Review 2014 Tax Extenders Extenders that will affect FSEA / IADD members the most Affordable Care Act Recent changes Coverage planning

2013 year in review Many new taxes Higher marginal federal tax rate New 3.8% tax net investment income New 20% capital gains tax rate Personal exemption phase-out PEASE limitation - itemized deductions limited New .9% additional medicare tax 2013 was not a favorable year for business owners

The Jones Family Mike – father, W-2 income of $180,000. Debra – wife, owns foil stamping company which made $120,000 after deducting an officer wage of $160,000 for the year. Both Debra and Mike own an LLC which collects rent from the company which made $60,000 during the year. They sold some stock during the year which they have owned the last three years at a gain of $30,000. Two children named Bert and Ernie who are dependents.

Tax Impact Related to 2013 Changes Summary of the Jones Tax Impact Related to 2013 Changes Removing the Payroll Tax Holiday $ 4,548 Personal Exemption Phase-Out Reinstated $ 6,100 Pease Reinstatement $ 2,900 3.8% Tax on Net Investment Income $ 3,420 Additional Medicare Tax $ 810 20% Capital Gains Tax $ 1,500 39.6% Marginal Fed Rate $ 3,565 9.85% MN Tax Rate $ 5,500 $ 28,343

What does 2014 have in store? 2014 Tax extenders Affordable Care Act

2014 Tax extenders 55 items expired at the end of 2013 Budget concerns – keeping these as temporary items vs. making them permanent

Extenders: Deduction for sales and general taxes Alternative fuel credits Plug-in elect vehicles Biofuel producer credit Renewable diesel Research & Development tax credits Low income housing credits Indian coal production Indian employment Credit maintain railroad tracks Construction energy efficient homes Energy efficient appliances Mine rescue team train Wage credit for activated military reservists School teacher expenses Cancellation of debt exclusion for principal residence Mass transit and employer parking benefits Deductibility of mortgage insurance premiums 15yr depreciation for leasehold improvements Work Opportunity Tax Credit Election to accelerate AMT credits in lieu of bonus depreciation Enhanced Section 179 expensing limits Energy efficient commercial building deduction Tuition and fees deduction Basis adjustment for S-Corporation charitable contributions Reduced s-corp built-in-gains tax periods Empowerment zone tax incentives

Extenders: Deduction for sales and general taxes Alternative fuel credits Plug-in elect vehicles Biofuel producer credit Renewable diesel Research & Development tax credits Low income housing credits Indian coal production Indian employment Credit maintain railroad tracks Construction energy efficient homes Energy efficient appliances Mine rescue team train Wage credit for activated military reservists School teacher expenses Cancellation of debt exclusion for principal residence Mass transit and employer parking benefits Deductibility of mortgage insurance premiums 15yr depreciation for leasehold improvements Work Opportunity Tax Credit Election to accelerate AMT credits in lieu of bonus depreciation Enhanced Section 179 expensing limits Energy efficient Commercial building deduction Tuition and fees deduction Basis adjustment for S-Corporation charitable contributions Reduced s-corp built-in-gains tax periods Empowerment zone tax incentives

Research & Development Tax Credit It is a government and state incentive for companies conducting research and development in the US. Any US company that designs, develops or improves products, processes, techniques, formulas or software may be eligible. Companies may be eligible for a federal tax credit up to 6.5% of “qualified expenses”. Many state tax credits and some are refundable.

Common misconceptions clients have We don’t have any scientists or people specializing in research. Our company manufactures other people’s parts – we don’t perform any of our own research. If I qualified for a large credit, my tax advisor would already be claiming it. We don’t do anything innovative. In general the credit is very broad

What is research and development? Qualified Research Activities – 4 Part Test Permitted Purpose Eliminating an Uncertainty Technological in Nature Process of Experimentation / Evaluate Alternatives

Recent developments Credit expired 12/31/2013. Bill passed by the Senate Finance Committee 4/3/2014 renews the R&D credit and expands it to offset AMT. Many favorable changes. Increased rate. Make the credit more simple. Benefit investors. Allow shared credit in case of contract research. NOT LAW YET.

Work Opportunity Tax credit Federal tax credit incentivizing companies to hire employees belonging to targeted groups Veterans Ex-felons Food stamp recipients Social security income recipients Summer youth employees Long-term family assistance

WOTC Example You hire Bob – a food stamp recipient at $10 per hour who works for you for 650 hours this year. At the end of the year you have paid him $6,500. Since Bob worked over 400 hours the credit is 40% of his wage up to $2,400. The tax credit for the company is $2,400. This credit can be up to $9,600 depending on the worker you hire. If over 125 but under 400hrs 25% credit

WOTC Developments Right now this credit has expired but it is expected to get renewed. Must get employee certification post marked within 28 calendar days! Although the credit may not be in place right now it doesn’t extend the 28 days. This credit is often overlooked.

Section 179 & bonus depreciation 2013 Section 179: Expense up to $500,000 of additions up to $2,000,000 of capital expenditures. Bonus depreciation: Write off up to 50% of the capital expense in 2013. $250k die cutter

Section 179 & bonus depreciation 2014 Section 179: Expense up to $25,000 of additions up to $200,000 of capital expenditures. Bonus depreciation: No bonus depreciation.

Section 179 & bonus depreciation Expectation Section 179: Expense up to $14X,000 of additions up to $2,000,000 of capital expenditures. Bonus depreciation: No bonus depreciation. Amendment to the bill passed by the senate finance committee to make the 500k / 2M permanent – offset to be provided. R&D credit - good outlook depreciation incentives are looking bad.

2014 extenders R&D credit would be a GREAT improvement for your industry. Accelerated depreciation is up in the air right now.

“Affordable care act” Updates: Final regulations clarify 90-day waiting period limit. Postponed required coverage for midsized businesses (50- 99 ft employees) until 2016. -health insurance issuer offering employer group health insurance cannot apply any waiting period (for employee coverage) that exceeds 90 days -

“Affordable care act” http://www.irs.gov/uac/Newsroom/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act#Transition

“Affordable care act” Most plan premiums increased under ACA. 2014 Most plan premiums increased under ACA. Many “healthy groups” decided to renew their plan before 2014 hit to lock in lower rates and not be subject to 2014 ACA changes. Government exchanges – State and Federal. Penalty for not having insurance - $95 per adult and $47.50 per child or 1% of taxable income. 20-35% Bigger hit for healthy groups - No pre-existing condition and minimum coverage requirements – 11 months to defer States setup or use healthcare.gov Greater – up to national bronze plan costs

“Affordable care act” Planning 1. Use the exchange as your health plan? 2014 – groups 0 – 50 employees can use the exchange as their health plan. 2015 – groups of 0 – 99 employees can use the exchange as their health plan. 2. Discontinue insurance and pay possible penalty?? *Worth consulting with an outsider on this topic. Example: Group plan vs. exchange Important to consider what your industry is doing “business reason” to offer insurance - Individual circumstances - may not owe penalty

Conclusion There are a lot of unknown’s right now with the 2014 tax extenders and this can be favorable or unfavorable for your business. Couple of good updates from the ACA legislation and small / medium sized businesses have more time to make a decision.

Contact John Woodrich, CPA, CGMA - Presenter jwoodrich@carlson-advisors.com John Reineck, CPA jreineck@carlson-advisors.com 7101 Northland Circle, Suite 123 Minneapolis, MN 55428 763-535-8150

Circular 230 disclosure To ensure compliance with requirements imposed by the IRS, we inform you that, unless specifically indicated otherwise, any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.

Thank you