D.C. QHTC Incentives: Subtle Changes Could Have Big Impact

Companies that previously have or have not applied for Qualified High Technology Company (“QHTC”) status in the District of Columbia should reassess their operations to see if they can take advantage of QHTC incentives for tax year 2013 and beyond.  Legislation has passed in the District that changes the definition of QHTC and also modifies the eligibility for some of the benefits [Technology Sector Enhancement Act of 1012, L. 2013, Act 19-513 (Law 19-211), effective 03/05/2013].  Aronson is urging taxpayers to evaluate and take advantage of these incentives before they change even further.  We expect that these incentives will be significantly reduced for coming tax years, both in amount of the incentive and number of companies eligible.

For tax year 2013, the principal change in the law pertains to the gross revenue that is required to be from one or more qualifying activities (i.e., internet related services, information and communication technology, advanced materials technologies, or engineering, biotechnology, or defense technology).  The old law required that a company must derive at least 51% of its gross revenue from qualifying activities.  The new rule requires that at least 51% of its gross revenue earned in the District be from qualifying activities.  Therefore, under the new law, taxpayers need to examine their District gross revenue and determine if at least 51% of such revenue is derived from qualifying activities.  Depending on the particular makeup of a company’s revenue, this change could result in a previously ineligible company now meeting the definition of a QHTC or could cause a business to no longer qualify as a QHTC.

The Act also changes the application of the five-year corporate franchise tax exemption.  First, the exemption will no longer be dependent on whether a QHTC conducts business in a high technology development zone.  Thus, any corporation that is a QHTC will have a five-year corporate franchise tax exemption.  Further, for QHTCs certified on or after 1/1/2012, the five-year exemption period will no longer begin when the company commenced business in the District.  Instead, the five-year exemption will not commence until the company has taxable income.

Generally, the credits and incentives available to companies meeting the definition of a QHTC will not change as a result of the Act.  The following benefits will still be available to QHTCs:

• Reduced franchise tax rate of 6%, as opposed to 9.975%;
• Five-year corporate franchise tax exemption;
• Exemption from the entity-level unincorporated business tax
• Certain tax credits, including:
  • Cost of retraining qualified disadvantaged employees;
  • Wages paid by a corporation to qualified disadvantaged employees;
  • Wages paid by a corporation to qualified employees for first 2 years; and
  • Reimbursement payments made by corporations for employee relocation costs;
• Other tax benefits, including:
  • Reduction in real property tax;
  • Sales tax exemption on purchases of certain computer equipment and sales by a QHTC of certain services; and
  • Leasehold improvement deductions.

However, the legislation does repeal the provision that excludes from District gross income qualified capital gains from the sale of assets held for more than five years.  Such assets include stock in a QHTC, a capital or profits interest in a QHTC partnership, or tangible property used in the business of a QHTC.

Taxpayers should considered the potential impact of the new rules now, as the changes could influence 2013 estimated payments as well as filing methodology.

For further information, please contact your Aronson tax advisor or Michael Colavito, State and Local Tax Services Group at 301.231.6200.

Jurisdiction to Tax Income Earned in a Foreign Country

If a U.S. company performs a contract, provides services or does some type of work directly in a foreign country or through a branch in a foreign country, foreign tax could be imposed on the revenue earned in that country. If the United States has a tax treaty with the foreign country, the business profits earned from the U.S. company’s business activities in the foreign country generally are taxable in the foreign country only if the U.S. company has a permanent establishment which is an office, branch or fixed base in the foreign country. If the United States does not have a tax treaty with the foreign country, Continue reading »

Valuation NewsFlash: Time is Running Out on Tax-Free Gifts

With the passage of the 2010 Tax Relief Act, Congress made it easier for business owners intending to make a substantial wealth transfer by increasing the lifetime gift exemption cap for 2012 to $5.12 million per person.

In the past, business owners structuring a major wealth transfer to their children often ran into the problem of not having enough lifetime gift exemption… and business owners were reluctant to pay gift tax on such a transfer. The expanded lifetime exemption cap gives business owners an unprecedented opportunity to shift business interests to their children and reduce the size of their estates, tax-free.

This golden opportunity offered by the 2010 Tax Relief Act is temporary, however! As it stands now, starting in 2013 the lifetime gift exemption cap will be reduced to $1 million per person.

As always, a properly executed estate planning strategy involving transfers of business ownership interests will require an objective and well-supported valuation analysis. For information about how Aronson LLC can provide assistance in this area, please contact Bill Foote at 301.231.6299.

IRS Issues Updated F.A.Q. for 2012 Offshore Voluntary Disclosure Program

On June 26, 2012, the IRS posted updated frequently asked questions and answers regarding the extended Offshore Voluntary Disclosure Program that it announced in January 2012 (http://www.irs.gov/businesses/small/international/article/0,,id=256774,00.html). The IRS decided to extend the program indefinitely following the success of the 2011 and 2009 Offshore Voluntary Disclosure Initiatives. In its press release IR-2012-64 on June 26, 2012, the IRS announced that the programs have resulted in the collection of more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures under the 2011 and 2009 programs. Another 1,500 disclosures also have been made since the program was extended in January 2012.

The purpose of the IRS Offshore Voluntary Disclosure Program is to motivate U.S. taxpayers to come into compliance voluntarily with the U.S. international reporting requirements and to prevent offshore tax evasion. The program allows U.S. taxpayers to file delinquent forms such as the Report of Foreign Bank and Financial Accounts (“FBAR”) Form TD F 90-22.1; Form 8938 regarding specified foreign financial assets; Form 5471 regarding foreign corporations owned by U.S. persons; Form 5472 regarding 25% foreign-owned U.S. corporations; Form 8865 regarding foreign partnerships owned by U.S. persons; Forms 3520 and 3520-A regarding foreign gifts and foreign trusts; and Form 926 regarding transfers of property to foreign corporations.

The voluntary disclosure period under the 2012 program includes the most recent eight years for which the filing due date has already passed. According to FAQ #9, the eight year voluntary disclosure period does not include current years for which there has not yet been non-compliance. For example, U.S. taxpayers who submit the voluntary disclosure prior to the original or extended filing due date for the year 2011 must include the years 2003 through 2010 in the disclosure. For U.S. taxpayers who disclose after the original or extended due date for the year 2011, the disclosure must include the years 2004 through 2011.

The applicable penalty for participating in the Offshore Voluntary Disclosure Program is 27.5% of the highest aggregate balance in foreign bank accounts or value of foreign assets during the period covered by the voluntary disclosure. In some limited circumstances, a lower penalty of 12% or 5% could apply based on the requirements in FAQs #52 and #53. The incentive to participate in the Offshore Voluntary Disclosure Program is that U.S. taxpayers are able to file delinquent forms that should have been filed for prior years while avoiding criminal liability.

According to FAQ #3, the 2012 Offshore Voluntary Disclosure Program does not have a set filing deadline by which U.S. taxpayers must apply. However, the IRS could change the terms of the program at any time going forward. For example, the IRS could increase the penalties, limit access to the program for certain taxpayers or end the program altogether.

For further information, please contact your Aronson tax advisor or Alison Dougherty, International Tax Services at 301.231.6795.

Burn down your house to get a tax deduction? May not be such a hot idea!

A property owner, wanting his lot cleared of the existing house so a new one could be built, donated the house to the fire department and claimed a charitable deduction.  The fire department burned the house down as a training exercise.

Using a valuation concept that has been around for years, the property owner obtained two appraisals – one valuing the property with the house, and one valuing the property without the house.  The difference between the two is presumably the fair market value of the house itself.  As this is the house that was given to the fire department, a charitable deduction was claimed for that value.

The IRS rejected this burnt offering.  The Tax Court agreed.  So did the 7th Circuit on appeal.  The case hinged on whether the value of the donation was greater than the benefit the taxpayers received.  The Court found that the fair market value of the property had to take into account the conditions the donor placed on the property and the benefit the donor received in return.  Namely, the donor gave the house on the condition that it be burned down and, in return, the house was demolished.

Since there is no market for houses that must be destroyed, the Court instead looked at the salvage value of the house.  It concluded the house was worth almost nothing.  Further, the Court found that the owners received a substantial benefit in that the fire department demolished the house, and this benefit outweighed the nominal value of the house. Although in this case the taxpayer did not receive the charitable deduction as sought, under the right set of facts and circumstances, a taxpayer can still qualify for a charitable deduction.

See here for the Tax Court ruling and fact details: http://www.ustaxcourt.gov/InOpHistoric/rolfsgallagher.TC.WPD.pdf and here for the 7th Circuit ruling: http://www.ca7.uscourts.gov/tmp/FM0R1XBH.pdf

For further information, please contact an Aronson tax professional at 301.231.6200.

Roth Conversion Recharacterization Deadline

By Mark Flanagan

Taxpayers have until 10/17/2011 to recharacterize (unwind) a “failed” Roth conversion, even if their initial return was filed by April 15th. An amended return can then be filed within the three year amended filing window, with the client getting a refund.

This may be very attractive for clients that converted their traditional IRA during 2010 only to have it lose significant value since the conversion. The extension to 10/17/2011 is little known and automatic, specifically for Roth conversion recharacterization purposes. Clients that converted and filed timely likely do not realize that recharacterizing is an option.

IN SUMMARY….Recharacterizations can be done up until 10/17/2011 and the amended return must be filed within three years.

No. 1 Reason Internet Startups Fail

By Jennifer Nolan

According to a recent report from Startup Genome, the number one reason internet startups fail is premature scaling. In fact, according to the report, startups that scale properly grow 20 times faster than startups that scale prematurely. The report maintains that startups that prematurely scale lose the battle early on by getting ahead of themselves. They can do this by prematurely scaling their team, their customer acquisition strategies or by over building the product. In addition, overinvesting in the early discovery stage can also be detrimental.
If you would like to obtain a copy of the Startup Genome report or if you are a startup and would like to test whether your company is scaling prematurely, you can obtain a copy of the report and sign up for the Startup Genome Compass at http://startupgenome.cc/. The Startup Genome Compass is a benchmarking tool for entrepreneurs where they are automatically classified by type and stage and compared to other startups in the same type and stage across more than 25 key performance indicators.

Worker Classification: The New ‘Get Out of Audit Jail Free’ Card!

By Larry Rubin

In recent years, the battle over how workers are classified has heated up.  Federal and state government agencies have been going after businesses that intentionally or unintentionally classify their workers inaccurately as independent contractors when they should have been classified as employees.  The resulting audits have proven to be very costly for companies that aren’t in compliance.

In a surprising move, the IRS recently announced the Voluntary Classification Settlement Program (VCSP), which will enable employers to address their worker classification noncompliance issues and resolve them with certainty at a relatively low tax cost.  The VCSP does not add any clarity to existing laws, but rather provides a mechanism for employers to reclassify its workers prospectively without incurring substantial costs and without being subject to an audit.

To be eligible, an employer must meet these three criteria:

1. The employer has treated all workers consistently – the individual has never been classified as an employee, and workers who hold a substantially similar position have also never been classified employees.
2. The employer has filed a Form 1099 for each misclassified worker for each of the past three years.
3. The employer cannot be presently under examination by the IRS for any reason, and is not presently under examination by the Department of Labor or any state government agency with respect to the worker classification issue.

To be part of the VCSP, the employer must fill out Form 8952 (Application for Voluntary Classification Settlement Program) at least 60 days prior to the date the employer wants to begin to reclassify the workers as employees.  The IRS will then review the employer’s eligibility, and contact the employer to complete the process and enter into a closing agreement.

If accepted into the VCSP, the employer will then:

• prospectively treat the subject workers as employees;
• pay 10% of the employment tax liability that would have been due for the previous year as computed under Code Section 3509;
• not be liable for interest or penalties;
• not be subject to a federal employment tax audit for prior years on the classification of these workers; and
• agree to extend the employment tax statute of limitations from 3 years to 6 years for each of the first three calendar years beginning after the VCSP closing agreement.

Further information can be found on the IRS’ FAQ page, and we strongly advise you to contact your Aronson tax advisor at 301.231.6200 to help avoid the potentially costly consequences of trying to handle this matter on your own.

“Important DC Tax Alert: Rate Hikes Imminent”

Governments continue to target upper-income taxpayers, with the District of Columbia the latest to increase tax rates. On Tuesday, the DC City Council created a new tax bracket for DC taxpayers with income over $350,000. These taxpayers will see their tax rate over that amount go from 8.5% to 8.95%, effective October 1st of this year. Mayor Vincent Gray is expected to sign the legislation.

The rush to increase the tax rate is an attempt to raise revenue to make up for a decision to delay the effective date of the city’s income tax on earnings from out-of-state municipal bonds from January 1, 2011 to January 1, 2012.

For more information about how these increases may affect your tax situation, please contact your Aronson Tax Services Group representative at 301.231.6200.

Personal Smartphone for work use

Now that it’s summertime and vacations are on the horizon for many, we think it is a good time to look at the devices used for keeping in contact with work when you are away from the office.  Several news articles have suggested that in today’s fast-paced economy, more and more workers are opting for sophisticated smartphones such as iPhones or Androids to better help them balance their personal and business lives with one device. With the advancement in cell phone technology, more companies are revising their Blackberry-only policies and are letting their employees use their personal phones to help do their jobs.  According to the Wall Street Journal article by Roger Cheng (http://online.wsj.com/article/SB10001424052748704641604576255223445021138.html), there are some benefits and pitfalls to letting workers use their personal phones for work matters.

According to the article, one of the benefits of the new phone policy is that businesses don’t have to purchase as many phones as before, which ultimately saves them money. Also, employees don’t have to carry around two devices.  The number one disadvantage of the new phone policy, as discussed in Roger Cheng’s article, has to do with security.  The new policy increases the company’s risk exposure by having sensitive business data on employees’ personal phones, which the company has no control over.  Another pitfall in allowing personal phones is that it creates added pressure for the company’s IT department to support several different operating systems instead of just one.

According to Roger Cheng, some companies are using different strategies to mitigate the security risks.  One strategy is locking and deleting, which allows the users to apply a password to their smartphone to prevent unauthorized access. The deleting feature allows the company to remotely erase the device in the event that the phone is lost, stolen or an employee leaves the company.  Another strategy is the use of software from Good Technology Inc, which sections out a small part of the employee’s device for corporate use only. The software allows the company to remotely erase only that portion of the device if the phone becomes lost or the employee leaves the company.

Allowing personal devices for corporate use has its advantages and disadvantages, but the company has the ultimate decision on whether or not to allow personal devices or stick to the Blackberry-only policy.  

By: Tosin Hassan and Heather Lepkowicz