Fall 2012 News, know-how and planning updates...
Tax & accounting newsletter
tax treatment of crop insurance proceeds– Many farmers in the midwest will file a crop insurance claim this year due to the widespread drought conditions that affected most crops. A major concern for these farmers is how and when this crop insurance payment will be taxed and what options are available to minimize their tax liability. The rules below outline the options available. There are two types of crop insurance payments that a farmer could receive. The first is called Revenue Protection. The farmer would receive a crop insurance payment if the market price of the commodity falls below a certain pre-established level. Revenue Protection payments are income in the year received by the farmer. There are no other options with these payments. For example, if the payment is received in 2013 for the 2012 crop the income is reported in 2013, the year it was received. The second type of crop insurance payment
is from a weather related event such as drought, flood, hail, wind, etc. The farmer does have a deferral option available with a weather related event payment. There are two qualifications that must be met in order for the farmer to use the deferral option. First, you must use the cash method of accounting. Second, you must establish that under your normal business practice the majority of the crop proceeds from the damaged crop would have been reported in a year following the year of harvest. For example, if you receive a crop insurance check on December 20, 2012 and your normal business practice is selling all your corn in the year of harvest, you cannot defer any of this crop insurance money and it will be taxed as income in 2012. However, if your normal business practice is selling the majority of your corn the year after harvest, you can defer reporting this crop insurance money until the 2013 tax year.
2012 Standard Mileage Rates As of January 1, 2012, the standard mileage rates for the use of a car, van, pickup, etc. is:
Even if you meet these two qualifications, you are not required to defer these crop insurance proceeds if you do not want to. If it is more advantageous for you to report these proceeds as income in 2012 when received, if you can. If you wish to defer these proceeds, you must defer all of them. You are not able to split them between 2012 and 2013. If you wish to defer crop insurance proceeds to the next year, an election must be filed with the tax return for the year you received the proceeds. The election must include a statement that identifies the crop that was damaged, cause and date of the damage, the name of the insurance company, the amount of the crop insurance proceeds received and a sentence stating that under normal business practice income from the damaged crops would have been included in the following year. Continued on Page 2...
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Health Care Reform Legislation EMPLOYER BENEFIT AND TAX CHANGES New benefits requirements – Employers with health plans that are not “grandfathered” must remain in compliance with the new coverage rules that: 1. bar lifetime and annual limits on coverage, 2. require plans to offer coverage to employees’ children up to the age of 26, 3. bar copays on preventative care, and 4. bar plans from rejecting anyone based on pre-existing conditions. Flexible spending arrangement limits – Employers must limit employee contributions to a flexible spending arrangement (FSA) to $2,500 beginning in 2013. Summaries of benefits and coverage – Employers must provide their employees with a summary of benefits and coverage as required for open enrollment beginning Sept. 23, 2012
Michigan Income Tax Changes There are several changes in Michigan income taxes for 2012 returns. The Michigan income tax rate for individual returns is reduced from 4.35 to 4.25 percent effective Oct. 1, 2012 making the 2012 effective rate 4.325 percent. The Michigan personal exemption is increased from $3,700 to $3,950 also effective October 1, 2012 making the effective 2012 deduction for personal exemptions $3,760. Several Michigan deductions and credits will be eliminated in 2012. Michigan “household income,” which is a limiting factor for several Michigan tax credits, is replaced by “household resources.” This new measure of income excludes losses from business (including farm losses), rentals and royalties and also excludes net operating loss carry forwards. The personal exemption deduction is eliminated for single filers with household resources over $100,000 and joint filers with household resources over $200,000. The special exemption deductions for seniors, unemployment compensation greater than 50 percent of adjusted gross income, disabled taxpayers and disabled dependents, and exemption for children under 18 are also eliminated. Further eliminated are the deductions for political contributions and the deduction for gross royalties subject to Michigan severance tax. Numerous credits are also repealed including the credits for city income tax, public contributions, homeless shelter contributions, food bank contributions, and contributions to community foundations.
Form W-2 reporting – Beginning with the 2012 calendar year, employers must report the cost of health coverage to their employees on form W-2.
There are also several complicated changes to the Michigan pension deduction. Taxpayers born after 1952 will no longer be able to exclude most pensions in 2012 and future years. Social security, railroad pensions, and military pensions will remain deductible until these taxpayers reach age 67. Upon reaching age 67, these taxpayers can elect to claim an exemption against all income of $20,000 for single filers and $40,000 for joint filers, or exempt all of their social security, railroad and military pensions, if their household resources are within certain limits.
Penalties for not offering adequate coverage – Employers with more than 50 full-time employees must be prepared to pay monthly penalties beginning in 2014 if they do not offer adequate coverage to employees.
Taxpayers born before 1946 are able to continue with the same retirement income deductions allowed on 2010 returns. Taxpayers born from 1946 to 1952 have special rules for deducting their retirement income. These taxpayers are able to take the $20,000 single deduction or $40,000 joint deduction before they reach age 67, if household resources are within certain limits.
INDIVIDUAL TAX CHANGES New Medicare taxes – Beginning in 2013, the individual Medicare tax rate on earned income higher than $200,000 for singles and $250,000 for joint filers will increase from 1.45 percent to 2.35 percent. For the first time, unearned income exceeding this threshold (such as capital gains, dividends and interest) will be subject to Medicare tax at a rate of 3.8 percent. Limits on deduction for medical expenses – Beginning in 2013, individuals under age 65 can deduct only health care costs exceeding 10 percent of income (versus 7.5 percent now).
Michigan also enacted a 6 percent income tax on C-Corporations and repealed the Michigan Business Tax effective in 2012. There will be no Michigan state income tax on pass-through entities (S-Corporations, Partnerships, and LLC’s) in 2012. However, Farm C-Corporations will be subject to this Corporate Income Tax in 2012. Prior to 2012, all farms were exempt from Michigan Business Tax and its predecessor, Single Business Tax.
Tax Treatment continued...
Crop Insurance Proceeds received in 2013 for the 2012 crop year must be reported in the year received. There is no deferral option to the year 2014 because you received the crop insurance money in the year after the damage occurred. It is very important to do some tax planning prior to year end to determine the best option for you to report these crop insurance payments. Contact your local GreenStone tax accountant for assistance with this tax planning.
COMPREHENSIVE REPAIR / CAPITALIZATION REGULATIONS The new regulations are generally effective for tax years beginning on or after Jan. 1, 2012. These regulations have been subject to much criticism over the past several months because they often rely on facts and circumstances tests in distinguishing repairs from capitalized expenses. This approach caused conflicts between the Internal Revenue Service (IRS) and taxpayers and as a result, the IRS is under pressure to further simplify the regulations. • New definition of materials and supplies – This regulation provides that materials and supplies are tangible property used or consumed in the taxpayer’s business operations that is not inventory, is a component acquired to maintain, repair or improve a unit of tangible property, and is reasonably expected to be consumed in 12 months or less or has an economic useful life of
12 months or less. This allows an election to capitalize materials and supplies and contains special rules for rotable spare parts. • De minimis expensing rule – Only taxpayers with an applicable financial statement (AFS), such as a certified audited financial statement, may claim a deduction for materials and supplies that are less than or equal to the greater of 0.1 percent of gross receipts or 2 percent of total depreciation and amortization expense as determined in its AFS. • Unit of Property (UOP) defined – In general, for real or personal property that is not classified as a building, all the components that are functionally interdependent comprise a single UOP. Each building and its structural components are one UOP. • Amounts paid to improve tangible property – Capital expenditures
Uncertainty Over Bush-Era Tax Cuts Lawmakers will return this fall to face a long list of tax issues that need to be addressed before the end of the year, including: • The research credit, which expired at the end of 2011 • The alternative minimum tax (AMT) with no “patch” for 2012 • The 2001 and 2003 tax cuts, scheduled to expire at the end of 2012 • Estate and gift rules agreed to in 2010, which will also expire at the end of 2012 The House and Senate have each approved bills to extend the 2001 and 2003 tax cuts and have each voted down the proposal from the other side with little progress being made. It is unlikely that any change will be enacted before the elections in November. No one is arguing for a long-term bill and at this time it appears that some of these tax cuts will be extended for one year by the lame-duck legislature with more substantive tax reform coming in 2013. This excruciating amount of uncertainty in the system makes tax planning extremely difficult. With the large deficit looming, most people would conclude that taxes probably are not going down. The table to the right illustrates an overview of some tax rates from 2011-2013:
are divided into three categories of improvements: betterments, restorations, and adaptations. Generally, whether an expenditure is an improvement is based on facts and circumstances. A safe harbor is provided for routine maintenance activities. • The downside – The new UOP rule for buildings is that improvements to a building system must be capitalized as part of the building. (For example, a new roof.) • The upside – The taxpayer will be able to recognize a loss on the disposition of a structural component of a building before it sells the entire building. Therefore, they will not have to continue to depreciate amounts allocable to structural components that are no longer in service. (For example, the old roof torn off and being replaced.)
Rates for ordinary income
10 - 35 percent
10 - 35 percent
15 - 39.6 percent
Long-term capital gains
0 - 15 percent
0 - 15 percent
10 - 20 percent
Child tax credit
AMT exemption, single
AMT exemption, married
Payroll tax holiday
Surtax on investment income
Estate tax top rate
Estate tax exemption
American Opportunity Credit
BONUS DEPRECIATION AND SECTION 179 EXPENSING
Section 179 limit
Section 179 phase-out
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Tax & ACCOUNTING news Inside this issue: - Crop Insurance Proceeds - Health Care Reform - Capitalization Regulations
- 2012 Standard Mileage Rates - Income Tax Changes - Bush-Era Tax Cuts
2012 Farm Bill
With the recent package of Farm Bill programs having expired on Sept. 30, farmers are demanding action by lawmakers. Here are some highlights from the Senate version of the Farm Bill: • Eliminates Direct Payments, Counter-Cyclical Payments (CCP), Average Crop Revenue Election (ACRE) payments and Supplemental Revenue Assistance Payments (SURE) as of the end of 2012. Beginning in 2013, all of these payments will be eliminated. • “Ends Farm Payments to Millionaires” - This is the Senate’s heading on this part of the Bill, but it actually refers to payments not being allowed if the total adjusted gross income (AGI) for the person or entity is $750,000 or more. • A new program called Ag Risk Coverage (ARC) will be implemented that will complement current crop insurance programs. It will protect against both yield and price losses. • Payments will only go to farmers with an active stake in the farming operation. • Payments will be capped at $50,000 per person or entity. • A stronger dairy program is proposed to protect dairy margins equal to the difference between the all-milk price and a national feed cost.
Based on the possibility of an increasing capital gains rate environment beginning in 2013, you may want to consider accelerating capital gains prior to 2013 to capture the lower tax rate. Additionally, if you expect a net capital gain for 2012 and 2013, you should explore deferring capital losses until 2013 when those losses might potentially offset capital gains taxed at a higher rate. You may also want to elect out of installment sale treatment and recognize the entire gain in 2012 as opposed to deferring the gain. If you are considering a major purchase of equipment, it may pay to place it in service in 2012 to take advantage of the higher Section 179 limit. However, there are current proposals in the U.S. House of Representatives and Senate to increase these limits in 2013. It is important to weigh both the economic considerations and tax considerations carefully for any transaction. Given the degree of uncertainty as we approach 2013, it is important to closely monitor the continuing tax debate in Washington, D.C.
This notice is required by IRS Circular 230, which regulates written communications about federal tax matters between tax advisors and their clients. To the extent the preceding information and or any attachment is a written tax advice communication, it is not a full “covered opinion.” Accordingly, this advice is not intended and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. Such assurances can be granted only by securing a covered opinion letter. Should you wish to explore the option of receiving a covered opinion letter relating to a tax advice matter, please contact your local office.