SBIR is a highly competitive program that encourages small
business to explore their technological potential and provides the incentive to
profit from its commercialization. By including qualified small businesses in
the nation's R&D arena, high-tech innovation is stimulated and the United
States gains entrepreneurial spirit as it meets its specific research and
development needs.
Competitive Opportunity for Small Business:
SBIR targets the entrepreneurial sector because that is
where most innovation and innovators thrive. However, the risk and expense of
conducting serious R&D efforts are often beyond the means of many small
businesses. By reserving a specific percentage of federal R&D funds for small
business, SBIR protects the small business and enables it to compete on the
same level as larger businesses. SBIR funds the critical startup and
development stages and it encourages the commercialization of the technology,
product, or service, which, in turn, stimulates the U.S. economy.
Since its enactment in 1982, as part of the Small Business
Innovation Development Act, SBIR has helped thousands of small businesses to
compete for federal research and development awards. Their contributions have
enhanced the nation's defense, protected our environment, advanced health care,
and improved our ability to manage information and manipulate data.
SBIR Qualifications:
Small businesses must meet certain eligibility criteria to
participate in the SBIR program.
American-owned and
independently operated
For-profit
Principal researcher employed by business
Company size limited to 500 employees
The SBIR System:
Each year, eleven federal departments and agencies are
required by SBIR to reserve a portion of their R&D funds for award to small
business.
Department of
Agriculture
Department of Commerce
Department of Defense
Department of Education
Department of Energy
Department of Health and Human Services
Department of Homeland Security
Department of Transportation
Environmental Protection Agency
National Aeronautics and Space Administration
National Science Foundation
These agencies designate R&D topics and accept
proposals.
Three-Phase Program:
Following submission of proposals, agencies make SBIR
awards based on small business qualification, degree of innovation, technical
merit, and future market potential. Small businesses that receive awards then
begin a three-phase program.
Phase I is the
startup phase. Awards of up to $100,000 for approximately 6 months support
exploration of the technical merit or feasibility of an idea or technology.
Phase II awards of
up to $750,000, for as many as 2 years, expand Phase I results. During this
time, the R&D work is performed and the developer evaluates
commercialization potential. Only Phase I award winners are considered for
Phase II.
Phase III is the period during which Phase II
innovation moves from the laboratory into the marketplace. No SBIR funds
support this phase. The small business must find funding in the private sector
or other non-SBIR federal agency funding.
Thursday, July 26, 2012
Small Business Technology Transfer Program (STTR)
STTR is an important small business program that expands funding
opportunities in the federal innovation research and development arena. Central
to the program is expansion of the public/private sector partnership to include
the joint venture opportunities for small business and the nation's premier
nonprofit research institutions. STTR's most important role is to foster the
innovation necessary to meet the nation's scientific and technological challenges
in the 21st century.
Competitive Opportunity for Small Business:
STTR is a highly competitive program that reserves a
specific percentage of federal R&D funding for award to small business and
nonprofit research institution partners. Small business has long been where
innovation and innovators thrive. But the risk and expense of conducting
serious R&D efforts can be beyond the means of many small businesses.
Conversely, nonprofit research laboratories are
instrumental in developing high-tech innovations. But frequently, innovation is
confined to the theoretical, not the practical. STTR combines the strengths of
both entities by introducing entrepreneurial skills to high-tech research
efforts. The technologies and products are transferred from the laboratory to
the marketplace. The small business profits from the commercialization, which,
in turn, stimulates the U.S. economy.
STTR Qualifications:
Small businesses must meet certain eligibility criteria to
participate in the STTR Program:
American-owned and independently operated
For-profit
Principal researcher need not be employed by small business
Company size limited to 500 employees
The nonprofit research institution must also meet certain eligibility
criteria:
Located in the US
Nonprofit college or university
Domestic nonprofit research organization
Federally funded R&D center (FFRDC)
The STTR System:
Each year, five federal departments and agencies are
required by STTR to reserve a portion of their R&D funds for award to small
business/nonprofit research institution partnerships.
Department of Defense
Department of Energy
Department of Health and Human Services
National Aeronautics and Space Administration
National Science Foundation
These agencies designate R&D topics and accept
proposals.
Three-Phase Program:
Following submission of proposals, agencies make STTR
awards based on small business/nonprofit research institution qualification,
degree of innovation, and future market potential. Small businesses that
receive awards then begin a three-phase program.
Phase I is the
startup phase. Awards of up to $100,000 for approximately one year fund the
exploration of the scientific, technical, and commercial feasibility of an idea
or technology.
Phase II awards of
up to $750,000, for as long as two years, expand Phase I results. During this
period, the R&D work is performed and the developer begins to consider
commercial potential. Only Phase I award winners are considered for Phase II.
Phase III is the
period during which Phase II innovation moves from the laboratory into the
marketplace. No STTR funds support this phase. The small business must find
funding in the private sector or other non-STTR federal agency funding.
Tuesday, July 24, 2012
Tax Treatment of Startup Expenses
Are you starting a new business?
If so, your “start-up” expenses generally can’t be currently deducted. You can, however, elect to deduct a limited amount of start-up costs for the tax year in which the active trade or business begins (up to $5,000 ($10,000 for a tax year beginning in 2010), reduced by the amount by which the start-up costs exceed $50,000 ($60,000 for a tax year beginning in 2010)), with the remainder amortizable ratably over a 180-month period beginning with the month in which the active trade or business begins. This election is only available for start-up expenses that relate to an active trade or business, and not to investments.
One way to avoid or minimize start-up expenses that are nondeductible or which must be amortized over a 180-month period is to buy an activity that has already been developed by another taxpayer to the point of being an active trade or business. Once an active business is acquired, amounts spent to expand it generally won’t be subject to the special rule barring the deduction of start-up expenses.
“Start-up” expenses subject to the special election include those incurred in: investigating the acquisition or creation of an active trade or business; creating an active trade or business; or carrying on an activity engaged in for profit before the activity becomes an active trade or business, in anticipation of the activity becoming an active trade or business.
The rule generally barring the current deduction of start-up expenses ceases to apply once the business becomes active, nor does the prohibition apply at any time to certain interest, taxes and research expenditures. Also, the rule generally barring the current deduction of start-up expenses doesn’t apply to the cost of expanding an already existing active trade or business.
Has your business reached the “active” stage?
The rule barring current deduction of start-up expenses only applies to expenses incurred before the activity becomes an active trade or business. Also, 180-month amortization begins with the month in which this happens and the election to amortize must be made with the return for the tax year in which the business reaches the active stage.
Generally speaking, if the activities of a taxpayer have advanced to the extent necessary to establish the nature of its business operations, the taxpayer will be considered to have begun an active business. For example, the acquisition of operating assets which are necessary to the type of an active business contemplated may constitute the beginning of an active business. On the other hand, the receipt of income, in and of itself, doesn’t necessarily mean that the active business stage has been reached. And even if all necessary business assets are on hand, IRS and some courts may require something more under certain circumstances before an activity is deemed to be an active business, for example, the commencement of marketing activities or the actual operation of business assets.
The time at which an activity becomes an active business is an important determination because a miscalculation on this point can cause the loss of important tax benefits. For instance, the election to deduct/amortize start-up expenditures must be made not later than the due date of the taxpayer’s return (including extensions) for the tax year in which the active business begins. If a taxpayer has any doubt as to when the active business began, an election should be made in the year the expenditures are paid or incurred, or at least in the first year there is any reason to believe IRS might take the position that business began. Otherwise, the right to make the election would be lost if IRS successfully claimed that the business actually began in an earlier year.
Do you expect to pay interest, taxes or research expenses in starting a new business?
Otherwise deductible interest, taxes and research expenses aren’t subject to the rule that generally bars the current deduction of start-up expenses.
Do you plan to expand an already existing active business?
Ordinary and necessary business expenses incurred in expanding an already existing active trade or business (whether purchased or created by the taxpayer) aren’t subject to the special limits on start-up expenses and are generally deductible.
Whether a taxpayer is expanding an old business or starting a new one can be a tricky determination in certain cases, especially where there is a change in the kind of business done as well as in the size of the old business.
If in doubt, consider treating the outlays in question as start-up expenses while making the amortization election. In the event that it’s later determined that you were in fact expanding an old business (and not creating a new one), it’s possible that you will still be able to deduct the expenses by filing an amended return. On the other hand, if the election isn’t made and the outlays are later determined to be start-up expenses, you will be stuck with expenditures that have to be capitalized and can’t be amortized.
If the intention is to expand an old business through a new and different entity (for example, through a newly organized partnership or corporate subsidiary), the expenses generally can’t be currently deducted.
Do you plan to expand an old business through a new entity?
If so, the special exception for expenses incurred to expand an old business may not apply. This is because the trade or business activities of one tax entity can’t be attributed to another for this purpose. For instance, if a partnership incurs expense to create additional branches or units for its already existing business to be carried on by separate tax entities, for example by newly organized corporations to be owned by the partnership, the expenses won’t qualify under the exception. One solution to this problem would be to have the partnership or other original entity first transfer part of its old business to the new corporation, then have the new corporation expand it. Or buy an old corporation that’s already in the same line of business and then have the old corporation expand that business. In either case, the corporation would be able to deduct the expansion outlays.
In the case of a corporate parent-subsidiary situation, a special rule may allow the deduction of expansion expenses incurred before the sub comes into existence if (1) the parent and the sub are in the same business, (2) the customers of the sub have the right to obtain goods or services from the parent if the sub can’t provide them, and (3) gross receipts from the expansion are reported as income on the affiliated group’s consolidated return. This might apply, for example, to a chain of health clubs.
Does the contemplated business require a license or franchise or other outlay that ordinarily must be capitalized?
The deduction/amortization election only applies to outlays that would be currently deductible if it weren’t for the start-up expense limitation. As a result, items that ordinarily have to be capitalized, such as the cost of acquiring a license or a franchise, don’t qualify for the election. However, the cost of a license or franchise may be amortizable.
Do you expect to incur syndication or organizational expenses?
Starting a new business may involve partnership or corporation organization expenditures. You can elect to deduct a limited amount of these expenditures (up to $5,000, reduced by the amount by which the organizational expenses exceed $50,000), with the remainder amortizable over a 180-month period beginning with the month in which the active trade or business begins. If the election isn’t made, no deduction would generally be allowed until the organization goes out of existence. Also, the deduction/amortization election doesn’t apply to partnership syndication expenses, which must always be capitalized.
Have you tried to start a new business, then given up on the project?
The deduction/amortization election doesn’t apply to unsuccessful search, investigatory, or pre-opening expenditures for a new business or a for-profit investment transaction. In the case of a corporation, these fruitless start-up costs can be deducted as a loss when the project is abandoned. But the unsuccessful start-up expenses of noncorporate taxpayers not engaged in a trade or business when the start-up costs are paid or incurred are, with one exception discussed below, treated as nondeductible, personal expenses.
Where a noncorporate taxpayer has gone beyond a general search for a new business to focus on a specific enterprise, the unsuccessful start-up expenses are deductible as a loss.
Noncorporate taxpayers contemplating substantial expenditures in investigating a new business should consider organizing a small business corporation to undertake the search and, if successful, to conduct the new business. If the search or investigation proves fruitless, the stockholders are entitled to an ordinary loss deduction on their small business corporation stock.
Do you plan to use depreciable assets in starting a new business?
Ordinarily, depreciation deductions are not available until the asset is placed in service in the taxpayer’s trade or business. However, elective deduction/amortization is available for amounts that would be deductible if paid or incurred in an existing business. Thus, the cost, for example, of a computer or word processor used to train new employees or to set up an accounting system, to the extent depreciable during the start-up period, should qualify for the deduction/amortization election.
If so, your “start-up” expenses generally can’t be currently deducted. You can, however, elect to deduct a limited amount of start-up costs for the tax year in which the active trade or business begins (up to $5,000 ($10,000 for a tax year beginning in 2010), reduced by the amount by which the start-up costs exceed $50,000 ($60,000 for a tax year beginning in 2010)), with the remainder amortizable ratably over a 180-month period beginning with the month in which the active trade or business begins. This election is only available for start-up expenses that relate to an active trade or business, and not to investments.
One way to avoid or minimize start-up expenses that are nondeductible or which must be amortized over a 180-month period is to buy an activity that has already been developed by another taxpayer to the point of being an active trade or business. Once an active business is acquired, amounts spent to expand it generally won’t be subject to the special rule barring the deduction of start-up expenses.
“Start-up” expenses subject to the special election include those incurred in: investigating the acquisition or creation of an active trade or business; creating an active trade or business; or carrying on an activity engaged in for profit before the activity becomes an active trade or business, in anticipation of the activity becoming an active trade or business.
The rule generally barring the current deduction of start-up expenses ceases to apply once the business becomes active, nor does the prohibition apply at any time to certain interest, taxes and research expenditures. Also, the rule generally barring the current deduction of start-up expenses doesn’t apply to the cost of expanding an already existing active trade or business.
Has your business reached the “active” stage?
The rule barring current deduction of start-up expenses only applies to expenses incurred before the activity becomes an active trade or business. Also, 180-month amortization begins with the month in which this happens and the election to amortize must be made with the return for the tax year in which the business reaches the active stage.
Generally speaking, if the activities of a taxpayer have advanced to the extent necessary to establish the nature of its business operations, the taxpayer will be considered to have begun an active business. For example, the acquisition of operating assets which are necessary to the type of an active business contemplated may constitute the beginning of an active business. On the other hand, the receipt of income, in and of itself, doesn’t necessarily mean that the active business stage has been reached. And even if all necessary business assets are on hand, IRS and some courts may require something more under certain circumstances before an activity is deemed to be an active business, for example, the commencement of marketing activities or the actual operation of business assets.
The time at which an activity becomes an active business is an important determination because a miscalculation on this point can cause the loss of important tax benefits. For instance, the election to deduct/amortize start-up expenditures must be made not later than the due date of the taxpayer’s return (including extensions) for the tax year in which the active business begins. If a taxpayer has any doubt as to when the active business began, an election should be made in the year the expenditures are paid or incurred, or at least in the first year there is any reason to believe IRS might take the position that business began. Otherwise, the right to make the election would be lost if IRS successfully claimed that the business actually began in an earlier year.
Do you expect to pay interest, taxes or research expenses in starting a new business?
Otherwise deductible interest, taxes and research expenses aren’t subject to the rule that generally bars the current deduction of start-up expenses.
Do you plan to expand an already existing active business?
Ordinary and necessary business expenses incurred in expanding an already existing active trade or business (whether purchased or created by the taxpayer) aren’t subject to the special limits on start-up expenses and are generally deductible.
Whether a taxpayer is expanding an old business or starting a new one can be a tricky determination in certain cases, especially where there is a change in the kind of business done as well as in the size of the old business.
If in doubt, consider treating the outlays in question as start-up expenses while making the amortization election. In the event that it’s later determined that you were in fact expanding an old business (and not creating a new one), it’s possible that you will still be able to deduct the expenses by filing an amended return. On the other hand, if the election isn’t made and the outlays are later determined to be start-up expenses, you will be stuck with expenditures that have to be capitalized and can’t be amortized.
If the intention is to expand an old business through a new and different entity (for example, through a newly organized partnership or corporate subsidiary), the expenses generally can’t be currently deducted.
Do you plan to expand an old business through a new entity?
If so, the special exception for expenses incurred to expand an old business may not apply. This is because the trade or business activities of one tax entity can’t be attributed to another for this purpose. For instance, if a partnership incurs expense to create additional branches or units for its already existing business to be carried on by separate tax entities, for example by newly organized corporations to be owned by the partnership, the expenses won’t qualify under the exception. One solution to this problem would be to have the partnership or other original entity first transfer part of its old business to the new corporation, then have the new corporation expand it. Or buy an old corporation that’s already in the same line of business and then have the old corporation expand that business. In either case, the corporation would be able to deduct the expansion outlays.
In the case of a corporate parent-subsidiary situation, a special rule may allow the deduction of expansion expenses incurred before the sub comes into existence if (1) the parent and the sub are in the same business, (2) the customers of the sub have the right to obtain goods or services from the parent if the sub can’t provide them, and (3) gross receipts from the expansion are reported as income on the affiliated group’s consolidated return. This might apply, for example, to a chain of health clubs.
Does the contemplated business require a license or franchise or other outlay that ordinarily must be capitalized?
The deduction/amortization election only applies to outlays that would be currently deductible if it weren’t for the start-up expense limitation. As a result, items that ordinarily have to be capitalized, such as the cost of acquiring a license or a franchise, don’t qualify for the election. However, the cost of a license or franchise may be amortizable.
Do you expect to incur syndication or organizational expenses?
Starting a new business may involve partnership or corporation organization expenditures. You can elect to deduct a limited amount of these expenditures (up to $5,000, reduced by the amount by which the organizational expenses exceed $50,000), with the remainder amortizable over a 180-month period beginning with the month in which the active trade or business begins. If the election isn’t made, no deduction would generally be allowed until the organization goes out of existence. Also, the deduction/amortization election doesn’t apply to partnership syndication expenses, which must always be capitalized.
Have you tried to start a new business, then given up on the project?
The deduction/amortization election doesn’t apply to unsuccessful search, investigatory, or pre-opening expenditures for a new business or a for-profit investment transaction. In the case of a corporation, these fruitless start-up costs can be deducted as a loss when the project is abandoned. But the unsuccessful start-up expenses of noncorporate taxpayers not engaged in a trade or business when the start-up costs are paid or incurred are, with one exception discussed below, treated as nondeductible, personal expenses.
Where a noncorporate taxpayer has gone beyond a general search for a new business to focus on a specific enterprise, the unsuccessful start-up expenses are deductible as a loss.
Noncorporate taxpayers contemplating substantial expenditures in investigating a new business should consider organizing a small business corporation to undertake the search and, if successful, to conduct the new business. If the search or investigation proves fruitless, the stockholders are entitled to an ordinary loss deduction on their small business corporation stock.
Do you plan to use depreciable assets in starting a new business?
Ordinarily, depreciation deductions are not available until the asset is placed in service in the taxpayer’s trade or business. However, elective deduction/amortization is available for amounts that would be deductible if paid or incurred in an existing business. Thus, the cost, for example, of a computer or word processor used to train new employees or to set up an accounting system, to the extent depreciable during the start-up period, should qualify for the deduction/amortization election.
Tuesday, July 17, 2012
Rights & Preferences, What to Expect from a VC
Your company has grown
to the point that you are no longer in need of “friends and family money” or angel
financing. You are now seeking venture
capital funding that will help move your company further down the growth
spectrum; but, you are not sure what to expect in terms of the rights and preferences
that a venture capitalist may require for its investment in your company. This article will briefly highlight some of
the more common rights and preferences that a venture capitalist will expect for
an investment in your company and that you will see outlined when you are
presented a term sheet by the venture capitalist.
Antidilution Rights
Antidilution rights protect the venture capitalist against the issuance of securities by your company at a later date for a price less than what was paid by the venture capitalist. If the venture capitalist purchased preferred stock in your company and is afforded antidilution protection, the term sheet will generally specify a formula for adjusting the conversion ratio to take into consideration any fluctuation in the share price upon the issuance of new securities.
Conversion Rights
If the venture capitalist is purchasing preferred stock, generally there will be conversion rights attached to those shares. Conversion rights can either be mandatory or optional. If the preferred stock is subject to mandatory conversion rights, the term sheet will specify what those events are and will provide a formula for the conversion of the preferred shares into common shares.
Drag Along, Tag Along, First Refusal, Co-Sale and Preemptive Rights
Generally, a venture capitalist will require the shares of stock it purchases to have any one or all of the following rights: the right of the venture capitalist to compel minority shareholders to participate in a stock sale (drag along); the right of a minority shareholder venture capitalist to sell its shares with the majority shareholders (tag along); the right of the venture capitalist to be first offered securities to be sold by other shareholders or your company (first refusal); the right of the venture capitalist to sell its securities along with any securities sold by other shareholders or your company (co-sale); and the right of the venture capitalist to acquire any newly issues securities issued by your company to the extent required to maintain the relative percentage ownership on an as-converted basis (preemptive).
Registration Rights
Registration rights entitle the venture capitalist to force your company to register shares of common stock issuable upon conversion of preferred stock with the Securities and Exchange Commission.
Voting Rights
Most commonly, the venture capitalist receives the number of votes equal to the number of shares of common stock into which its securities may convert upon a conversion trigger event. The term sheet will generally describe whether the preferred stock purchased by the venture capitalist has “class” or “protective” voting rights or whether the venture capitalist has special rights to take control of your company upon the occurrence of certain events of default. The venture capitalist will often have the right to elect (or otherwise appoint for election by the company’s shareholders) one or more members of the board of directors of your company.
Information Rights
If the venture capitalist is a minority shareholder, the venture capitalist will typically desire the right, which should be specified in the term sheet, to receive monthly and/or quarterly financial statements, an annual audited financial statement, and an annual budget, as well as the ability to have interim access to the books and records of your company.
Dividend Preference
Many times a venture capitalist will be entitled to special dividends or other preferential returns on the securities it purchases. The term sheet will also set forth whether such dividends will accumulate to the extent not paid and whether the holders of common stock or any other junior securities may receive dividends or other distributions if accumulated dividends owing to the venture capitalist are not paid.
Liquidation Preference
For the risks associated with investing in an early stage company, venture capitalists may require a premium on the investment. Liquidation preference refers to the right of a venture capitalist to receive a return prior and in preference to other shareholders on liquidation or sale of your company.
These are just a few of the common rights and preferences that you can expect to see contained in the initial term sheet you receive from a venture capitalist. The term sheet is designed to highlight the most important business terms of the equity sale and will almost always provide that the definitive agreements will contain such other customary terms and conditions as may be appropriate. It is important for you to understand what every each provision of the term sheet means to your company and its capital structure. Seek out counsel and advice early in the process so that you can be better prepared during the negotiation of the terms and conditions of the venture capitalists investment into your company.
Antidilution Rights
Antidilution rights protect the venture capitalist against the issuance of securities by your company at a later date for a price less than what was paid by the venture capitalist. If the venture capitalist purchased preferred stock in your company and is afforded antidilution protection, the term sheet will generally specify a formula for adjusting the conversion ratio to take into consideration any fluctuation in the share price upon the issuance of new securities.
Conversion Rights
If the venture capitalist is purchasing preferred stock, generally there will be conversion rights attached to those shares. Conversion rights can either be mandatory or optional. If the preferred stock is subject to mandatory conversion rights, the term sheet will specify what those events are and will provide a formula for the conversion of the preferred shares into common shares.
Drag Along, Tag Along, First Refusal, Co-Sale and Preemptive Rights
Generally, a venture capitalist will require the shares of stock it purchases to have any one or all of the following rights: the right of the venture capitalist to compel minority shareholders to participate in a stock sale (drag along); the right of a minority shareholder venture capitalist to sell its shares with the majority shareholders (tag along); the right of the venture capitalist to be first offered securities to be sold by other shareholders or your company (first refusal); the right of the venture capitalist to sell its securities along with any securities sold by other shareholders or your company (co-sale); and the right of the venture capitalist to acquire any newly issues securities issued by your company to the extent required to maintain the relative percentage ownership on an as-converted basis (preemptive).
Registration Rights
Registration rights entitle the venture capitalist to force your company to register shares of common stock issuable upon conversion of preferred stock with the Securities and Exchange Commission.
Voting Rights
Most commonly, the venture capitalist receives the number of votes equal to the number of shares of common stock into which its securities may convert upon a conversion trigger event. The term sheet will generally describe whether the preferred stock purchased by the venture capitalist has “class” or “protective” voting rights or whether the venture capitalist has special rights to take control of your company upon the occurrence of certain events of default. The venture capitalist will often have the right to elect (or otherwise appoint for election by the company’s shareholders) one or more members of the board of directors of your company.
Information Rights
If the venture capitalist is a minority shareholder, the venture capitalist will typically desire the right, which should be specified in the term sheet, to receive monthly and/or quarterly financial statements, an annual audited financial statement, and an annual budget, as well as the ability to have interim access to the books and records of your company.
Dividend Preference
Many times a venture capitalist will be entitled to special dividends or other preferential returns on the securities it purchases. The term sheet will also set forth whether such dividends will accumulate to the extent not paid and whether the holders of common stock or any other junior securities may receive dividends or other distributions if accumulated dividends owing to the venture capitalist are not paid.
Liquidation Preference
For the risks associated with investing in an early stage company, venture capitalists may require a premium on the investment. Liquidation preference refers to the right of a venture capitalist to receive a return prior and in preference to other shareholders on liquidation or sale of your company.
These are just a few of the common rights and preferences that you can expect to see contained in the initial term sheet you receive from a venture capitalist. The term sheet is designed to highlight the most important business terms of the equity sale and will almost always provide that the definitive agreements will contain such other customary terms and conditions as may be appropriate. It is important for you to understand what every each provision of the term sheet means to your company and its capital structure. Seek out counsel and advice early in the process so that you can be better prepared during the negotiation of the terms and conditions of the venture capitalists investment into your company.
Monday, July 16, 2012
Sunday, July 8, 2012
Energy Department Announces $102 Million for Small Business Research
The Energy Department announced on June 27 that it will
award new funding to 104 small businesses nationwide. The grants, totaling more
than $102 million, will support businesses in 26 states, helping companies to
develop promising technologies with a strong potential for commercialization
and job creation.
Funded through the Energy Department's Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, the selections are for Phase II work. In Phase II, companies will build on the conceptual work undertaken in Phase I and pursue the next steps in bringing the technologies to market. The Phase II awards are up to $1 million for work over two years. The awards support developing technologies in areas ranging from large wind turbine towers to more energy-efficient data centers. For example, the Xunlight 26 Solar company of Toledo, Ohio, will work on transparent, flexible cadmium telluride modules for photovoltaics.
Funded through the Energy Department's Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, the selections are for Phase II work. In Phase II, companies will build on the conceptual work undertaken in Phase I and pursue the next steps in bringing the technologies to market. The Phase II awards are up to $1 million for work over two years. The awards support developing technologies in areas ranging from large wind turbine towers to more energy-efficient data centers. For example, the Xunlight 26 Solar company of Toledo, Ohio, will work on transparent, flexible cadmium telluride modules for photovoltaics.
California, New Jobs Credit Update
The Franchise Tax Board (FTB) has announced that as of June
30, 2012, $121,123,174 ($117,441,362 as of June 3, 2012) in total New Jobs
Credit was generated on personal income tax and business entity tax returns
filed/processed. California has allocated $400 million for this tax credit.
Taxpayers may only claim the credit on an original timely filed return received
by the FTB on or before a cut-off date specified by the FTB. The cut-off date
is the last day of the calendar quarter within which the FTB estimates it will
have received timely filed original returns claiming the credit that
cumulatively total $400 million. A new jobs credit of up to $3,000 per
additional full-time employee hired is allowed to qualified small businesses
with 20 or less employees.
New York, Empire Zone Credits Denied
The Tax Appeals Tribunal (TAT) denied the petitions of the
taxpayer, failing to find a valid business purpose for the formation of an
entity seeking Empire Zone credits. The taxpayer, an owner of several home
furnishing related businesses, had reorganized certain portions of the
business, installing a holding company as the owner of a home furniture
retailing business and attempting to obtain Empire Zone enterprise credits
based on the establishment of the new entity. The Division of Taxation
determined, on audit, that the formation of the holding company lacked a valid
business purpose and the taxpayer was not entitled to Empire Zone Credits, a
finding which was upheld by the Administrative Law Judge. The TAT held that the
taxpayer's business was required, pursuant to N.Y. Tax Law § 14(j)(4)(B) and
N.Y. Tax Law § 208(o)(1)(D) , to have a valid business purpose and to not have
been formed solely to acquire Empire Zone benefits. As the record lacked any
contemporaneous evidence supporting the taxpayer's contention that the holding
company was established as part of a liability segregation plan and the
establishment of the holding company did not meaningfully change the economic
position of the taxpayer's business, the taxpayer failed the valid business
purpose test under N.Y. Tax Law § 208(o)(1)(D) and the new business test under
N.Y. Tax Law § 14(j)(4)(B) and therefore was ineligible to receive Empire Zone
credits. Furthermore, the TAT determined that the application of N.Y. Tax Law §
14 was not unconstitutionally retroactive, as it applied to the receipt of
prospective benefits and noted that entitlement to Empire Zone credits is not a
right, but a matter of legislative grace. (In the Matter of the Petition of
Dunk & Bright Furniture Co., Inc. and James F. Bright, N.Y.S. Tax Appeals
Tribunal, Nos. 823026, 06/28/2012).
Ohio Enacts Bill Exempting R&D Property for Aerospace Vehicles from Sales Tax
Ohio enacted legislation that, effective Sept. 10, creates
a sales tax exemption for property related to the research and development of
aerospace vehicles.
The legislation (H.B. 487) exempts from sales tax, sales of tangible personal property, including materials and other consumables, or services used or consumed in performing research and development activities with respect to aerospace vehicles.
Also exempted from tax are human performance equipment and technology associated with operating and testing aerospace vehicles. The legislation defines “aerospace vehicles” as any manned or unmanned aviation device including, but not limited to, aircraft, airplanes, helicopters, missiles, rockets, and space vehicles.
In addition, the legislation provides that telecommunications equipment used in direct marketing no longer needs to be purchased from a direct marketing vendor to be exempt from sales tax.
Dealers in intangibles are required to remit tax payments to the tax commissioner instead of the treasurer, and the commissioner, rather than the treasurer, must ascertain the difference in tax liability for an amended or final assessment that is certified.
Dealers in intangibles will no longer receive a certificate of abatement from the commissioner for a refund of overpaid taxes. Instead they must apply for a refund of overpaid taxes by filing an application for final assessment.
The legislation (H.B. 487) exempts from sales tax, sales of tangible personal property, including materials and other consumables, or services used or consumed in performing research and development activities with respect to aerospace vehicles.
Also exempted from tax are human performance equipment and technology associated with operating and testing aerospace vehicles. The legislation defines “aerospace vehicles” as any manned or unmanned aviation device including, but not limited to, aircraft, airplanes, helicopters, missiles, rockets, and space vehicles.
In addition, the legislation provides that telecommunications equipment used in direct marketing no longer needs to be purchased from a direct marketing vendor to be exempt from sales tax.
Dealers in intangibles are required to remit tax payments to the tax commissioner instead of the treasurer, and the commissioner, rather than the treasurer, must ascertain the difference in tax liability for an amended or final assessment that is certified.
Dealers in intangibles will no longer receive a certificate of abatement from the commissioner for a refund of overpaid taxes. Instead they must apply for a refund of overpaid taxes by filing an application for final assessment.
Energy Department Awards $14 Million for Energy Efficiency in 22 States
The Energy Department announced on June 27 that its State
Energy Program has awarded $14 million to state-led energy efficiency projects
in 22 states. The funds will allow the government agencies to conduct energy
efficiency upgrades to public facilities and develop local policies and
programs to help reduce energy waste and save taxpayer money. These investments
are part of the Energy Department’s strategy to create jobs, boost domestic
manufacturing in energy-saving technologies, and help Americans save money.
The state-led projects will conduct whole-building energy efficiency upgrades across hundreds of public buildings, saving millions of dollars for state and local governments and creating new local jobs for energy auditors, architects, engineers and construction workers. The states include Alabama, Alaska, Arizona, California, Hawaii, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Rhode Island, Virginia, Washington, and Wisconsin. The projects fall under two broad categories, including advancing energy efficiency in public buildings and deploying fee-based self-funded public facilities energy retrofit programs.
The state-led projects will conduct whole-building energy efficiency upgrades across hundreds of public buildings, saving millions of dollars for state and local governments and creating new local jobs for energy auditors, architects, engineers and construction workers. The states include Alabama, Alaska, Arizona, California, Hawaii, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Rhode Island, Virginia, Washington, and Wisconsin. The projects fall under two broad categories, including advancing energy efficiency in public buildings and deploying fee-based self-funded public facilities energy retrofit programs.
Obama Administration Announces Investments in Biofuels
The Energy Department, the U.S. Department of Agriculture
(USDA), and the U.S. Navy on July 2 announced $30 million in federal funding to
match private investments in commercial-scale advanced drop-in biofuels.
Drop-in biofuels are fuels that can serve as direct replacements or supplements
to existing gasoline, diesel, and jet fuels, without any changes to existing
fuel distribution networks or engines—and have the potential to significantly
reduce U.S. reliance on oil imports. DOE is also offering a total of $32
million in new investments for earlier-stage research that will continue to
drive technological breakthroughs and additional cost reductions in the
industry.
In his Blueprint for a Secure Energy Future released in March 2011, President Obama set a goal of reducing oil imports by one-third by 2025, increasing energy efficiency, and speeding development of biofuels and other alternatives. As part of that effort, the blueprint directed the DOE, the Navy, and the USDA to collaborate to support commercialization of drop-in biofuel substitutes for diesel and jet fuel, which lead to the current Funding Opportunity Announcement (FOA). This FOA has a two-phased approach, with government and industry sharing in the cost. In Phase 1, applicants will submit a design package and comprehensive business plan for a commercial-scale biorefinery, identify and secure project sites, and take additional required steps spelled out in the announcement. Awardees selected to continue into Phase 2 will submit additional information for the construction or retrofit of a biorefinery.
In his Blueprint for a Secure Energy Future released in March 2011, President Obama set a goal of reducing oil imports by one-third by 2025, increasing energy efficiency, and speeding development of biofuels and other alternatives. As part of that effort, the blueprint directed the DOE, the Navy, and the USDA to collaborate to support commercialization of drop-in biofuel substitutes for diesel and jet fuel, which lead to the current Funding Opportunity Announcement (FOA). This FOA has a two-phased approach, with government and industry sharing in the cost. In Phase 1, applicants will submit a design package and comprehensive business plan for a commercial-scale biorefinery, identify and secure project sites, and take additional required steps spelled out in the announcement. Awardees selected to continue into Phase 2 will submit additional information for the construction or retrofit of a biorefinery.
Tax Law Changes Impacting Businesses, the Patient Protection and Affordable Care Act
Tax credits to certain small employers that provide
insurance. The new law provides small employers with a tax credit (i.e., a
dollar-for-dollar reduction in tax) for nonelective contributions to purchase
health insurance for their employees. The credit can offset an employer's
regular tax or its alternative minimum tax (AMT) liability.
Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.
Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.
Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer's nonelective contributions toward the employees' health insurance premiums. The credit phases out as firm-size and average wages increase. Tax-exempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer's nonelective contributions toward the employees' health insurance premiums.
Special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees' health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost.
Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Any employee with respect to a self-employed individual is not an employee of the employer for purposes of this credit if the employee is not performing services in the trade or business of the employer. Thus, the credit is not available for a domestic employee of a sole proprietor of a business. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.
Most small businesses exempted from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”), most small businesses won't have to worry about this provision because employers with fewer than 50 employees aren't subject to the “pay or play” penalty. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who doesn't offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit (also allowed under the new law) will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, 2014.
The “Cadillac tax” on high-cost health plans. The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.
Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010. Employers with age and gender demographics that result in higher premiums can value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.
Small business employers eligible for the credit. To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (“FTEs”), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.
Years the credit is available. The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.
Calculating the amount of the credit. For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer's nonelective contributions toward the employees' health insurance premiums. The credit phases out as firm-size and average wages increase. Tax-exempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer's nonelective contributions toward the employees' health insurance premiums.
Special rules. The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees' health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost.
Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Any employee with respect to a self-employed individual is not an employee of the employer for purposes of this credit if the employee is not performing services in the trade or business of the employer. Thus, the credit is not available for a domestic employee of a sole proprietor of a business. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.
Most small businesses exempted from penalties for not offering coverage to their employees. Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called “pay or play”), most small businesses won't have to worry about this provision because employers with fewer than 50 employees aren't subject to the “pay or play” penalty. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who doesn't offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit (also allowed under the new law) will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, 2014.
The “Cadillac tax” on high-cost health plans. The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as “Cadillac” health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.
Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010. Employers with age and gender demographics that result in higher premiums can value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.
Tax Law Changes Impacting Individuals, the Patient Protection and Affordable Care Act
Individual mandate. The new law contains an “individual
mandate”—a requirement that U.S. citizens and legal residents have qualifying
health coverage or be subject to a tax penalty. Under the new law, those
without qualifying health coverage will pay a tax penalty of the greater of:
(a) $695 per year, up to a maximum of three times that amount ($2,085) per
family, or (b) 2.5% of household income over the threshold amount of income
required for income tax return filing. The penalty will be phased in according
to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the
flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and
2.5% of taxable income in 2016. Beginning after 2016, the penalty will be
increased annually by a cost-of-living adjustment. Exemptions will be granted
for financial hardship, religious objections, American Indians, those without
coverage for less than three months, aliens not lawfully present in the U.S.,
incarcerated individuals, those for whom the lowest cost plan option exceeds 8%
of household income, those with incomes below the tax filing threshold (in 2010
the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for
couples), and those residing outside of the U.S.
Premium assistance tax credits for purchasing health insurance. The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an Exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an Exchange. Under the provision, an eligible individual enrolls in a plan offered through an Exchange and reports his or her income to the Exchange. Based on the information provided to the Exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an Exchange, the premium payments are made through payroll deductions.
The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved.
Higher Medicare taxes on high-income taxpayers. High-income taxpayers will be hit with a double whammy: a tax increase on wages and a new levy on investments.
Higher Medicare payroll tax on wages. The Medicare payroll tax is the primary source of financing for Medicare's hospital insurance trust fund, which pays hospital bills for beneficiaries who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker's wages without limit.
Under the provisions of the new law, which take effect in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. Companies won't be responsible for determining whether a worker's combined income with his or her spouse makes them subject to the tax. Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Self-employed persons will pay 3.8% on earnings over the threshold. Married couples with combined incomes approaching $250,000 will have to keep tabs on both spouses' pay to avoid an unexpected tax bill. It should also be noted that the $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more and more people will be subject to the higher taxes in coming years.
Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with adjusted gross income (AGI) above $200,000 and joint filers with AGI over $250,000 (unindexed). Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won't apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax. Because the new tax on investment income won't take effect for three years, that leaves more time for Congress and IRS to tinker with it. So we can expect lots of refinements and “clarifications” between now and when the tax is actually rolled out in 2013.
Floor on medical expenses deduction raised from 7.5% of AGI to 10%. Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer's AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.
Limit on reimbursement of over-the-counter medications from HRAs, HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, 2010.
Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from an HSA or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.
Health flexible spending arrangements (FSAs) are limited to $2,500. An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.
Dependent coverage in employer health plans. Effective on Mar. 23, 2010, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.
Excise tax on indoor tanning services. The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed, but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.
Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011 The adoption assistance exclusion is also increased by $1,000.
Premium assistance tax credits for purchasing health insurance. The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an Exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an Exchange. Under the provision, an eligible individual enrolls in a plan offered through an Exchange and reports his or her income to the Exchange. Based on the information provided to the Exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an Exchange, the premium payments are made through payroll deductions.
The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved.
Higher Medicare taxes on high-income taxpayers. High-income taxpayers will be hit with a double whammy: a tax increase on wages and a new levy on investments.
Higher Medicare payroll tax on wages. The Medicare payroll tax is the primary source of financing for Medicare's hospital insurance trust fund, which pays hospital bills for beneficiaries who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker's wages without limit.
Under the provisions of the new law, which take effect in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. Companies won't be responsible for determining whether a worker's combined income with his or her spouse makes them subject to the tax. Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Self-employed persons will pay 3.8% on earnings over the threshold. Married couples with combined incomes approaching $250,000 will have to keep tabs on both spouses' pay to avoid an unexpected tax bill. It should also be noted that the $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more and more people will be subject to the higher taxes in coming years.
Medicare payroll tax extended to investments. Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with adjusted gross income (AGI) above $200,000 and joint filers with AGI over $250,000 (unindexed). Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won't apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax. Because the new tax on investment income won't take effect for three years, that leaves more time for Congress and IRS to tinker with it. So we can expect lots of refinements and “clarifications” between now and when the tax is actually rolled out in 2013.
Floor on medical expenses deduction raised from 7.5% of AGI to 10%. Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer's AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.
Limit on reimbursement of over-the-counter medications from HRAs, HSAs, FSAs, and MSAs. The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, 2010.
Increased penalties on nonqualified distributions from HSAs and Archer MSAs. The new law increases the tax on distributions from an HSA or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.
Health flexible spending arrangements (FSAs) are limited to $2,500. An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.
Dependent coverage in employer health plans. Effective on Mar. 23, 2010, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.
Excise tax on indoor tanning services. The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed, but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.
Liberalized adoption credit and adoption assistance rules. For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011 The adoption assistance exclusion is also increased by $1,000.
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