Talking Shop Blog

We’ve talked about “tax extenders” many times before. Those are the tax credits, deductions and exclusions that expire each year – but always get extended for another year.

The Infernal Revenue Code includes over 60 tax provisions that expired last year, including over 50 annual extenders.

Senate Finance Committee Chairman Max Baucus says it’s time to come up with a long term plan to address the continuing uncertainty caused by the tax extenders.

Baucus says “the lack of certainty about these tax extenders is bad for American families, bad for businesses looking to create jobs and bad for our economy.”

He also notes that “each day businesses do not know whether tax extenders will be in place means less American manufacturing, less production and fewer jobs.”

We couldn’t agree more.

Baucus also wants to address the extenders now – as part of the payroll tax extension debate. He doesn’t want to wait until after the election.

You can read more at http://finance.senate.gov/newsroom/chairman/release/?id=a12ea58b-4a3e-49a9-8025-820307b82a1d

Yesterday the Chicago Tribune had a good editorial about capital gain taxes that’s worth a read.

The Tribune makes some excellent points:

1)    The main goal of low capital gains tax rates is to encourage investment.

2)    Higher capital gains rates increase the cost of capital that businesses need to grow — and grow jobs.

3)    The lower capital gains rates apply to everyone – not just the wealthy.

On that last point, check out our Blog on Tax Planning for Middle America at http://blogs.duganlopatka.com/general/2011/10/05/tax-planning-for-middle-america/

By the way, you can find our just released 2012 Handy Tax Guide in PDF format at http://www.duganlopatka.com/images/PDF/dl-handy-tax-guide-2012.pdf

And you can read the full Tribune editorial at http://www.chicagotribune.com/news/opinion/editorials/ct-edit-romney-20120130,0,486473.story

On the political front, the Republican Presidential debates continue and President Obama delivers his State of The Union Address tonight.

On the budget side, the Administration has asked Congress to raise the nation’s debt ceiling by $1.2 trillion. And the national debt stands at over $15.2 Trillion and counting.

How about taxes? Actually, there’s not much going on right now, and that’s a problem for everyone.

More than 60 tax provisions expired at the end of last year, according to the Joint Committee on Taxation. We covered a few of them in a recent blog, which you can find at http://blogs.duganlopatka.com/general/2012/01/09/2012-tax-changes/ .

And there’s the 2 month extension of the payroll tax cut that expires at the end of February.

Most commentators feel that Congress and the Administration will find some way to extend the payroll tax cut through the end of the year. We’ll see.

On the other hand, many fear that the legislative process will effectively shut down for the duration of the 2012 campaign. If that happens, all of those expired tax provisions won’t be addressed until after the elections.

You can check the latest on the national debt at   http://www.usdebtclock.org/ .

And the Joint Committee on Taxation has a complete list of expiring tax provisions from 2011-2022, which you can find in PDF format at http://www.jct.gov/publications.html?func=startdown&id=4380

Congress left town last month without acting on a “tax extenders” bill. Those are the tax credits, deductions and exclusions that expire each year – but always get extended for another year.

Here are some of the key tax provisions that expired at the end of last year.

• The research and development tax credit.
• The 100 percent bonus depreciation deduction – which means the lower 50% bonus depreciation deduction applies for qualified property acquired and placed in service this year.
•  The AMT “Patch” – which means some 34 million taxpayers will incur the tax this year, accordingly to the Congressional Research Service. 
• A reduced Section 179 expensing limit.  For tax years beginning in 2012, the expensing election is reduced to $139,000 from $500,000 last year. And the investment ceiling amount is reduced to $560,000 down from $2 million last year. For tax years beginning after 2012, the limit is further reduced to $25,000 with a $200,000 ceiling.

We’ll see what happens with the tax extenders when Congress comes back to town. Stay tuned.

As widely reported, Springfield lawmakers have approved the Sears and CME Holdings tax incentives. Governor Quinn has indicated that he will sign the legislation.

Here are some of the other tax provisions contained in the bills:

•             The R & D credit has been extended for an additional 5 years—through tax years ending before January 1, 2016.  The change allows for a full 5 year carry forward of earned credit.

•             The net operating loss deduction is reinstated for tax years ending 12/31/12 through 12/31/14, but is capped at $100,000 per year.  The life of the carry forward period is extended by a year for each year the loss carry forward is either suspended or limited by the cap.  

•             The estate tax exemption is increased to $3.5 million for 2012 and to $4 million for 2013 and thereafter.

•             The Replacement Tax income tax investment credit is extended for another 5 years.  It was scheduled to expire 12/31/13 and will now remain in place through 12/31/18.

•             The personal income tax standard deduction will be indexed beginning next year. The standard deduction for 2012 will increase from $2000 to $2050. For 2013 and thereafter, the $2050 standard deduction will automatically be increased based on increases in the consumer price index.

The IRS has released the 2012 optional standard mileage rates for use of an automobile for business, medical, moving and charitable purposes.

The 2012 standard mileage rate remains unchanged at 55.5 cents per mile for business use of a vehicle, including cars, vans, pick-ups and panel trucks. 

The rate is reduced to 23 cents per mile for medical and moving uses, and remains at 14 cents per mile for charitable uses.

The updated rates are effective for deductible transportation expenses paid or incurred on or after January 1, 2012, and for mileage allowances or reimbursements paid to, or transportation expenses paid or incurred by, an employee or a charitable volunteer on or after January 1, 2012.

You can find more information from the IRS at http://www.irs.gov/newsroom/article/0,,id=250882,00.html

The Internal Revenue Service has announced the 2012 cost-of-living adjustments (COLA) for qualified retirement plans, including 401(k) profit-sharing plans and Individual Retirement Accounts.

You can find the COLA information at http://www.irs.gov/retirement/article/0,,id=96461,00.html

The tax filing deadline for 2010 Form 1040s is a week from today. And we still have some clients that haven’t filed their returns yet.

Why?  They’re waiting for K-1’s.

Google “Waiting for K-1” and you get “About 4,170,000 results in (0.27 seconds).” 

I don’t think 4 million people are still waiting for a K-1.  But quite a few are.

In the 70s and 80s real estate limited partnerships were the rage. These days its hedge funds and master limited partnerships.

And that means late K-1’s and some unique tax return reporting.

I wonder how many investors are well versed in “Mark to Market Elections”, “Section 1256 Contracts and Straddles”, “Original Issue Discount, “DPGR Gross Receipts ” or “Oil, Gas & Geothermal Gross Income (AMT)”?

And then there are state filing requirements: “The Partnership operates in various states, some of which impose an income tax on a Partner’s share of income allocable to such state.”

“I have to file a return in how many states?!?”

Of course, just about all K-1’s say ‘Please consult your tax advisor.”

But if you’re doing your own returns, you may want to check out the IRS instructions on K-1 reporting at http://www.irs.gov/pub/irs-pdf/i1065sk1.pdf . From there, you’ll find references to a hundred other forms, publications and code sections.

To learn more about tax reporting for master limited partnerships, check out http://blogs.duganlopatka.com/general/2010/08/23/tax-reporting-for-master-limited-partnerships/ .

A week to go!

The proposed jobs bill includes a number of tax increases, including higher taxes on hedge fund managers through the so-called “carried interest” provisions.

A carried interest is an interest in a partnership received in exchange for services to the partnership.

The carried interest proposals were originally targeted at hedge fund managers. But the proposed legislation extends the provisions to profits interests in real estate and other types of investments.

Fund managers in hedge funds and private equity funds typically receive a 20% interest in the profits of the fund in exchange for managing the fund.

Say a fund has $100,000 in long term capital gains for the year. The manager’s 20% share, $20,000, is currently taxed at the 15% capital gain rate. 

The bill, if enacted, would tax that income at the higher ordinary income rates and the income would be subject to self employment tax as well.  Combine the two and the effective tax rate is close to 50%. And that’s before state income taxes.  

Maybe there’s a good argument for taxing a fund manager’s profits this way. Maybe not.

But we’ve got a problem with extending these provisions to rental and investment real estate ventures.

It’s common for a general partner to acquire a profits interest when putting together a real estate deal.

The general partner/developer is the one who takes the entrepreneurial risks associated with real estate ventures.

And the reward is a share in the potential “upside” of the deal.

Congress should treat “entrepreneurial capital” the same as other forms of “capital”, like money and property.

And that means capital gains rates, not ordinary income rates.