1

July 2013

TAX ALERTS

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

AB 93 Effectively Eliminates the

Enterprise Zone Program

This article is reproduced with permission from Spidell Publishing, Inc., © 2013

AB 93 (Blumenfield), which makes major changes to the Enterprise Zone program, has been passed by the Senate and the Assembly and is awaiting the Governor’s signature. The Governor has been a driving force behind these changes, so his signature is essentially guaranteed. The bill eliminates the current Enterprise Zone Hiring Credit for employees hired on or after January 1, 2014. Employees hired and vouchered prior to January 1, 2014, will continue generating credit for their first 60 months of employment. The bill gives taxpayers a 10-year carryforward period to use these credits.

The bill also provides a new sales and use tax exemption for manufacturing equipment beginning in 2014. This benefit will apply for tax years through July 1, 2019 (2021 for taxpayers in certain areas). A new credit will be available for taxable years beginning on or after January 1, 2014, and ending before January 1, 2021. The new credit applies to fewer employees than the current credit, and certain industries are specifically excluded. For the full text of the bill, go to: http://leginfo.ca.gov/pub/13-14/bill/asm/ab_0051-0100/ab_93_bill_20130627_enrolled.pdf For more information about this article, please contact Tax and Accounting Partner, Susan Laputz at slaputz@windes.com or Senior Manager, Bella Wang at bwang@windes.com or by phone at (562) 435-1191. ~

www.windes.com

2

Senate Passes Internet Sales Tax Bill

that will require State Sales Tax

on all Online Purchases

On May 6, 2013, the Senate passed the Marketplace Fairness Act of 2013 (aka, the "Internet Sales Tax Bill" by 69-27. Passage in the Senate was considered a major hurdle for taxing Internet sales. The bill, if passed in the House and signed by the President, would enable states to collect sales and use tax from certain online sellers on sales made to customers in the state. The bill proposes a complete change from the current law, which provides that a state may not compel a seller to collect the state's tax unless the seller has a physical presence within that state.

Small Seller Exemption The Marketplace Fairness Act (the Act) includes an exception intended to protect small businesses. For example, a state would not be allowed to require tax collection by a seller that had gross annual receipts in total remote sales in the preceding year of $1 million or less. Persons with one or more ownership relationships to one another would have their sales aggregated if such relationships were determined to have been designed with the principal purpose of avoiding the application of the Act. Proponents of the bill say that the main issue is fairness. Brick-and-mortar retailers have long argued that the physical presence restriction provides Internet sellers with an unfair advantage. By not collecting sales tax, an online retailer seller can, in effect, sell an item at a lower price than a store. Retailers who operate stores have increasingly complained of "show-rooming" by customers who come to a store to browse and then order the same merchandise online where they will not be charged for sales tax. On the other hand, opponents of the bill say it would kill jobs and place an unreasonable compliance burden on small online businesses that are forced to deal with more bureaucracy and collect tax in approximately 9,600 jurisdictions. Conservative groups also contend that the Marketplace Fairness Act allows overreaching by state governments. Authority to require tax collection The Act would allow a state to require all online sellers that do not qualify for the small seller exemp-tion to collect tax on all taxable sales sources to that state. Streamlined sales tax member states would be granted this authority beginning 180 days after the state publishes notice of its intent to exercise its taxing authority under the Act, but not earlier than the first day of the calendar quarter that is at least 180 days after the enactment of the Act. Non-streamlined sales tax member states, on the other hand, would receive this authority beginning no earlier than the first day of the calendar quarter that is at least six months after the date that the ~~

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

3

Senate Passes Internet Sales Tax Bill... (continued) state enacts legislation to exercise the authority and implements the Marketplace Fairness Act's mandatory simplification requirements. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) 435-1191, (949) 271-2600, or (213) 239-9745.

Key Facts Regarding Tax Refund Offsets

Certain financial debts from your past may affect your current federal tax refund. The law allows the use of part or all of your federal tax refund to pay federal or state debts that you owe. Here is important information from the IRS about tax refund offsets.

1. A tax refund offset generally means the U.S. Treasury has reduced your federal tax refund to pay for certain unpaid debts.

2. The Treasury Department’s Financial Management Service (FMS) is the agency that issues tax refunds and conducts the Treasury Offset Program.

3. If you have unpaid debts, such as overdue child support, state income tax or student loans, FMS may apply part or all of your tax refund to pay that debt.

4. You will receive a notice from FMS if an offset occurs. The notice will include the original tax refund amount and your offset amount. It will also include the agency receiving the offset payment and that agency’s contact information.

5. If you believe you do not owe the debt or you want to dispute the amount taken from your refund, you should contact the agency that received the offset amount, not the IRS or FMS.

6. If you filed a joint tax return, you may be entitled to part or all of the refund off-set. This rule applies if your spouse is solely responsible for the debt. To request your part of the refund, file Form 8379, Injured Spouse Allocation.

For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) 435-1191, (949) 271-2600, or (213) 239-9745.

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

4

Social Security Wage Base Expected

to Rise to $115,500 for 2014

The Social Security Administration's Office of the Chief Actuary (OCA) has projected that the Social Security wage base will increase from $113,700 for 2013 to $115,500 for 2014. Background The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age,

Survivors and Disability Insurance (OASDI, commonly known as the Social Security tax); and the other for Hospital Insurance (HI, commonly known as the Medicare tax). The FICA tax rate for employees and employers is 7.65% each—6.2% for OASDI up to the wage base, and 1.45% for HI (no maximum). Also, there is a 0.9% additional Medicare tax that applies to all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return). In effect, this makes the Medicare tax rate 2.35% for wages in excess of those amounts. For self-employed workers, the FICA tax is 15.3%—12.4% for OASDI and 2.9% for HI. The 0.9% additional Medicare tax similarly applies to self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return). In effect, this makes the Medicare tax rate 3.8% for self-employment income in excess of these amounts. Projections for 2014 and Onward The 2014 projections were included as part of the annual report to Congress by the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Fund programs (The 2013 OASDI Trustees Report). The SSA provides three kinds of forecasts for Social Security wage bases (low-cost, intermediate, and high-cost). The SSA intermediate forecasts through 2022 are as follows:

2014 — $115,500 2015 — $118,500 2016 — $123,600 2017 — $130,500 2018 — $137,700 2019 — $144,900 2020 — $152,100 2021 — $159,000 2022 — $165,600

The Social Security wage base is also projected to be $115,500 in 2014 under the low-cost and high-cost forecasts. In addition, the OCA projected, as part of the high-cost forecast, the possibility that the Social Security wage base might reach $167,400 in 2022. C

on

tact u

s a

t ta

xa

lert

s@

win

des.c

om

5

Social Security Wage Base Expected to Rise... (continued) Actual annual increases to the wage base are announced in October of the preceding year and are based on then-current economic conditions. As a result, the OCA's forecasts, especially the longer-range ones, are subject to change. Last year, the OCA correctly projected in its 2012 annual report that the Social Security wage base would increase to $113,700 in 2013. The OCA is continuing to project that the Social Security trust fund will become insolvent in 2033. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) 435-1191, (949) 271-2600, or (213) 239-9745.

New Information Return for

Some Like-Kind Exchanges

This article is reproduced with permission from Spidell Publishing, Inc., © 2013

Beginning January 1, 2014, taxpayers who complete a like-kind exchange of California property for property located out of state will be required to file an information return with the California Franchise Tax Board (FTB). The information return must be filed for the year in which the exchange is completed and each subsequent year that the gain or loss is deferred. If the taxpayer fails to file an information return, and a required tax return is not filed, the FTB may estimate net income and assess tax, interest, and penalties. For the full text of the bill, go to: http://leginfo.ca.gov/pub/13-14/bill/asm/ab_0051-0100/ab_92_bill_20130614_enrolled.pdf For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) 435-1191, (949) 271-2600, or (213) 239-9745.

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

6

Keep the Child Care Credit

in Mind for Summer

If you are a working parent or looking for work this summer, you may need to pay for the care of your child or children. These expenses may qualify for a tax credit that can reduce your federal income taxes. The Child and Dependent Care Tax Credit is available not only while school is out for summer, but also throughout the year. Here are eight key points the IRS wants you to know about this credit.

1. You must pay for care so you – and your spouse if filing jointly – can work or actively look for work. Your spouse meets this test during any month that your spouse is a full-time student, or physically or mentally incapable of self-care.

2. You must have earned income. Earned income includes earnings such as wages and self-employment. If you are married filing jointly, your spouse must also have earned income. There is an exception to this rule for a spouse who is full-time student or who is physically or mentally incapable of self-care.

3. You must pay for the care of one or more qualifying persons. Qualifying children under age 13 who you claim as a dependent meet this test. Your spouse or dependent who lived with you for more than half the year may meet this test if he or she is physically or mentally incapable of self-care.

4. You may qualify for the credit whether you pay for care at home, at a daycare facility outside the home or at a day camp. If you pay for care in your home, you may be a household employer.

5. The credit is a percentage of the qualified expenses you pay for the care of a qualifying person. It can be up to 35 percent of your expenses, depending on your income.

6. You may use up to $3,000 of the unreimbursed expenses you pay in a year for one qualifying person or $6,000 for two or more qualifying persons.

7. Expenses for overnight camps or summer school tutoring do not qualify. You cannot include the cost of care provided by your spouse or a person you can claim as your dependent. If you get dependent care benefits from your employer, special rules apply.

8. Keep your receipts and records to use when you file your 2013 tax return next year. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your return.

For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) 435-1191, (949) 271-2600, or (213) 239-9745.

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

7

How Are Vacation Homes Taxed?

Vacation homes offer owners many tax breaks similar to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The values of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate. Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they

pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions. Vacation homeowners do not need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motor home so long as it includes sleeping, cooking, and toilet facilities. Capital Gain on Vacation Properties Gains from selling a vacation home are generally taxed as long-term capital gains on Schedule D. As with a primary residence, basis includes the property's contract price (including any mortgage assumed or taken "subject to"), nondeductible closing costs (title insurance and fees, surveys and recording fees, transfer taxes, etc.), and improvements. "Adjusted proceeds" include the property's sale price, minus expenses of sale, such as real estate commissions, title fees, etc. The maximum tax on capital gain is now 20 percent, with an additional 3.8 percent net investment tax depending upon income level. There is no separate exclusion that applies when selling a vacation home as there is up to $500,000 for a primary residence. Vacation Home Rentals Many vacation homeowners rent those homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.

1. Income from rentals totaling not more than 14 days per year is nontaxable. 2. Income from rentals totaling more than 14 days per year is taxable and is generally

reported on Schedule E of Form 1040. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

8

How Are Vacation Home Taxed? (continued)

3. Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property, which entitles them to a greater number of deductions.

For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) 435-1191, (949) 271-2600, or (213) 239-9745.

Foreign Account Tax Compliance Act

(FATCA) Compliance Requirements

for U.S. Multinationals

The FATCA rules, which impose significant reporting, documentation and withholding obligations, are not limited to financial institutions. These rules can also impose significant and burdensome requirements on U.S. multinationals. Below is a summary of the steps U.S. multinationals should take in order to ensure their compliance with FATCA. Generally effective for payments made after December 31, 2012 (but delayed in Internal Revenue Service (IRS) guidance; see below), the Hiring Incentives to Restore Employment Act of 2010 established rules for withholdable payments to foreign financial institutions (FFIs; generally including non U.S. banks, broker-dealers and other custodians, investment vehicles, and certain insurance companies) and for withholdable payments to other foreign entities. The new rules provide for with-holding taxes to enforce new reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S.-owned foreign entities ("U.S. accounts"). Under Internal Revenue Code (IRC) Section 1471(d), a financial account is defined as any depository or custodial account maintained by the financial institution, or any equity or debt interest in the financial institution (other than interests regularly traded on an established securities market). Under IRC Section 1471(a), a withholding agent must withhold 30% of certain payments to an FFI unless the FFI has entered into an "FFI agreement" with the IRS to report certain information, among other things, with respect to U.S. accounts. The registration, due diligence, information reporting and withholding obligations for U.S. source FDAP income under FATCA are generally effective as of January 1, 2014. Entities will have to determine by October of 2013 whether they qualify as FFIs and, to the extent they do, register with IRS. Application to U.S. Multinationals U.S. multinationals may have group companies that could qualify as FFIs, such as treasury centers, captive financing or insurance companies, and retirement funds. Although most of the discussion ~~~~~~

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

9

FATCA Compliance Requirements for U.S. Multinationals (continued)

related to FATCA's implications on U.S. payors of U.S. source with-holdable payments has been focused on financial institutions, U.S. multinationals and, in certain scenarios, U.S. citizens and tax residents, may have withholding obligations. U.S. multinationals making withholdable payments to entities outside of the U.S. have to withhold 30% under the FATCA rules unless the entities make certain disclosures to the IRS and to the U.S. with-holding agent payor. For purposes of complying with the FATCA rules, U.S. multinational enterprises are expected to implement

certain procedures that may require changes to previously used accounts payable systems and compliance processes. U.S. multinationals should consider taking the following steps to ensure their compliance with FATCA:

(1) The multinational has to make a determination as to which of the payments it makes qualifies as a "withholdable payment" for purposes of FATCA. Withholdable payments generally include U.S. source fixed or determinable, annual or periodical (FDAP) income, such as interest, dividends, and most types of royalties and rents as well as gross proceeds from the sale of securities that could generate U.S. source income. Income effectively connected to a U.S. trade or business (e.g. fees for certain services), however, will not be subject to withholding under FATCA.

(2) Next, the multinational should determine whether the non-U.S. recipient of the

withholdable payment is an FFI or a non-financial foreign entity ("NFFE"). Generally, NFFEs that are publicly traded (including their subsidiaries) are not subject to FATCA. Non-publicly traded NFFEs and FFIs, however, must either comply with the disclosure rules or be subject to the 30% withholding tax.

(3) To the extent the income recipient identified in Step 2 is an FFI, an inquiry must be

made to determine whether the FFI is a participating FFI or a non-participating FFI. Non-participating FFIs will be subject to the 30% withholding.

(4) For NFFE recipients, information should be requested and reported regarding any

substantial U.S. owners. If such information is not provided, the payment should be subject to the 30% withholding tax.

In order to meet the above requirements, MNEs would have to build out compliance processes to ensure that all necessary determinations, monitoring, documentation and reporting is in place for purposes of complying with the FATCA rules. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) 435-1191, (949) 271-2600, or (213) 239-9745.

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

10

Calculate Imputed Interest

on Below-Market Loans

Loans without interest or at below-market interest rates are recharacter-ized so that the lender must recognize market-rate interest income. Put another way, below-market loans are loans for which a rate of interest that is lower than the applicable federal rate (AFR) (which is computed by the government and released by the IRS on a monthly basis). Special adjustments might be necessary to determine the interest rate on short-period loans, variable-rate loans, and loans denominated in foreign currencies.

Categories of bargain-rate loans. The below-market loan rules apply to a loan within one of six categories:

gift loans;

compensation-related loans;

corporation-shareholder loans;

tax avoidance loans;

loans to qualified continuing care facilities; or

other below-market loans. Below-market demand loans. Below-market demand loans are restructured for tax purposes so that the foregone interest is treated as transferred from the lender to the borrower, either as a gift, charitable contribution, dividend, compensation, or other payment, and retransferred by the borrower to the lender as interest. The foregone interest attributable to each calendar year is treated as transferred and retransferred on the last day of that year. Below-market term loans. Below-market loans other than gift or demand loans are term loans, which are restructured for tax purposes so that the excess of the loan amount over the present value of all required loan payments, that is, the loan's original issue discount (OID), is treated as transferred from the lender to the borrower on the date of the loan. The lender and borrower recognize the interest under the OID rules over the life of the loan. The principal distinction between the treatment of a gift or demand below-market loan and a term below-market loan, therefore, is in the timing of the consideration deemed transferred by the lender to the borrower. In both instances, the borrower is treated as paying interest and the lender as receiving interest income. Exceptions/Exemptions The below-market loan rules include several exceptions and exemptions. There is a $10,000 de minimis exception for gift loans, compensation-related loans, and corporation-shareholder loans. Israeli bonds, loans between an employer and an employee stock ownership plan (ESOP), and loans ~~

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

11

Calculate Imputed Interest on Below-Market Loans (continued) to qualified continuing care facilities are also exceptions to the rules. For gift loans directly between individuals, the imputed interest payment cannot exceed the borrower's net investment income for the borrower's tax year. Special rules apply to below-market employee relocation loans, loans from foreign persons, loans between spouses, and interest obligations that are cancelled, waived or forgiven. A lender must attach a statement to an income return that reports income or deductions arising from below-market loans. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) 435-1191, (949) 271-2600, or (213) 239-9745.

Supreme Court Strikes Down

The Defense of Marriage Act

This article is reproduced with permission from Spidell Publishing, Inc., © 2013

The Supreme Court has ruled that the Defense of Marriage Act (DOMA) is unconstitutional. (U.S. v. Windsor (June 26, 2013) 570 U.S. ___) While this decision will certainly affect the RDP and same-sex married couple taxpayers in many ways, it is not yet clear how the IRS will handle the decision. We will keep you posted as this issue develops. For now, however, it is recommend that taxpayers consider filing amended returns for open years, claiming the right to file as married for income and estate tax purposes, provided the taxpayers would benefit from a married filing. These protective refund claims will prevent the statute of limita-tions from running on these returns while all of these issues are settled. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) 435-1191, (949) 271-2600, or (213) 239-9745.

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

12

Co

nta

ct u

s a

t ta

xa

lert

s@

win

des.c

om

Visit us online at: www.windes.com

Windes & McClaughry is a recognized leader in the field of accounting, assurance, tax, and business

consulting services. Our goal is to exceed your expectations by providing timely, high-quality, and

personalized service that is directed at improving your bottom-line results. Quality and value-added

solutions from your accounting firm are essential steps toward success in today’s marketplace. You

can depend on Windes & McClaughry to deliver exceptional client service in each engagement. For

over eighty-five years, we have gone beyond traditional services to provide proactive solutions and

the highest level of capabilities and experience.

Windes & McClaughry’s team approach allows you to benefit from a wealth of technical expertise

and extensive resources. We service a broad range of clients, from high-net-worth individuals and

nonprofit organizations to privately held businesses and publicly traded companies. We act as

business advisors, working with you to set strategies, maximize efficiencies, minimize taxes, and take

your business to the next level.

Orange County Office

18201 Von Karman Avenue

Suite 1060

Irvine, CA 92612

Tel: (949) 271-2600

Headquarters

111 West Ocean Boulevard

Twenty-Second Floor

Long Beach, CA 90802

Tel: (562) 435-1191

Los Angeles Office

601 South Figueroa Street

Suite 4950

Los Angeles, CA 90017

Tel: (213) 239-9745

© 2013, Windes & McClaughry Accountancy Corporation