Monthly Archives: October 2012

John L. Smith delayed salary payments

Arkansas coach John L. Smith appears to have structured the bulk of his $850,000 salary to be paid after the likely end of his bankruptcy proceedings.

Smith, who was hired to a 10-month contract in April, filed for Chapter 7 bankruptcy in early September. An amended filing last week showed the former Michigan State and Louisville coach has $40.7 million in liabilities and $1.3 million in assets.

Smith’s original letter of agreement in April called for him to be paid $425,000 in equal month installments from the university and the same amount from the athletic department’s fundraising arm, the Razorback Foundation.

His finalized contract, signed in July, shows Smith will receive $600,000 of his salary following the end of the regular season in December and into early next year – with $300,000 coming on Dec. 31 and the same amount on Feb. 23, 2013. The contract was signed a week after Smith acknowledged publicly to The Associated Press that he was facing bankruptcy as a result of land deals gone bad in Kentucky.

In the contract, only $250,000 of the salary is paid by the university while the rest comes from the Razorback Foundation in the two payments.

Smith has a meeting Friday with a long list of creditors in U.S. Bankruptcy court in Fayetteville, a day before the Razorbacks (2-4, 1-2 Southeastern Conference) host Kentucky. He was asked Monday if he approached the university about altering his payment schedule from the original letter of agreement, but he quickly sidestepped the question.

“I’ll comment on football,” Smith said. “I’d rather not comment on any of that. That’s not in my hands.”

Smith was then asked how his Friday meeting would impact his preparation for Saturday’s game with the Wildcats (1-5, 0-3).

“I’m preparing for Kentucky,” Smith said.

Arkansas athletic director declined comment through university spokesman Kevin Trainor on Monday. Trainor said it was common for the university to work with coaches and their representatives to structure payouts as they desired.

Once the Chapter 7 proceeding is complete, Smith will be released from the debts, assuming there are no ensuing complications.

2013 Income Tax Update


This may be the final year that the so-called Bush tax cuts remain in effect, unless Congress acts to further extend them. The Bush tax cuts, enacted in 2001 and 2003, were originally scheduled to expire for tax years beginning in 2011. However, President Obama signed legislation in late 2010 that temporarily extended the Bush tax cuts through 2012.

Many commentators agree that Congress is unlikely to extend the Bush tax cuts prior to the November elections, but uncertainty remains as to whether Congress will take action following the elections. Provided that Congress fails to extend the Bush tax cuts, many significant rate changes and other substantive changes will take effect in 2013. This article summarizes the major federal income tax changes that are scheduled take effect in 2013 if Congress allows the Bush tax cuts to expire, certain other changes scheduled to take effect independent of the Bush tax cuts, and planning strategies to reduce the impact of these changes. If you or your company would like to discuss any of these scheduled changes or planning strategies, please contact any member of the Tax and Employee Benefits Team.

Individual Income Tax Rates

If Congress allows the Bush tax cuts to expire, ordinary income tax rates will increase for most individual taxpayers beginning in 2013. As discussed below, qualified dividend income that is currently taxed at long-term capital gain rates will be taxed at these higher ordinary income rates. The following table sets forth the scheduled rate increases, using 2012 dollar amounts which will be adjusted for inflation in 2013.

Tax Brackets (2012 Dollar Amounts) Marginal Rate
Unmarried Filers Married Joint Filers
Over But Not Over Over But Not Over 2012 2013
$0 $8,700 $0 $17,400 10% 15%
8,700 35,350 17,400 70,700* 15% 15%
35,350 85,650 70,700* 142,700 25% 28%
85,650 178,650 142,700 217,450 28% 31%
178,650 388,350 217,450 388,350 33% 36%
388,350 388,350 35% 39.6%

* In 2013, this dollar amount will decrease to 167% of the amount for unmarried taxpayers in the same bracket (which is $58,900 in 2012), rather than 200% of the amount for unmarried taxpayers under current law. This change will have the effect of putting more middle-income joint filers in the 28% bracket and increasing the “marriage penalty” for many taxpayers.

Long-Term Capital Gain Rates

The maximum rate on long-term capital gain is scheduled to increase from 15 to 20 percent in 2013. Individual taxpayers in the 10 and 15 percent ordinary income tax brackets currently pay no tax on long-term capital gain. These taxpayers are scheduled to be subject to a 10 percent long-term capital gain rate in 2013. An 18 percent maximum rate will apply to capital assets purchased after 2000 and held for more than five years. Additionally, the 3.8 percent Medicare contribution tax discussed below will increase the effective rate of tax on long-term capital gains for certain higher-income taxpayers to as high as 23.8 percent. The following table sets forth the scheduled rate increases.

Maximum Rates 2012 2013 2013 (including Medicare contribution tax)
Long-Term Capital Gain 15% 20% 23.8%
Qualified 5-Year Capital Gain 15% 18% 21.8%

Planning Strategies. If Congress fails to take action as the year-end approaches, investors who were otherwise considering selling appreciated stocks or securities in early 2013 should give additional consideration to selling in 2012 to take advantage of the lower rate, assuming they will have held the asset for longer than one year. Additionally, business owners who are considering selling their business in the near future should consult with their tax adviser to discuss whether electing out of the installment method for an installment sale in 2012 would be more advantageous from a tax planning perspective.

Dividend Income Rates

The Bush tax cuts created the concept of “qualified dividend income,” which currently allows dividends received from domestic corporations and certain foreign corporations to be taxed at the taxpayer’s long-term capital gain rate. Additionally, qualified dividend income earned by mutual funds and exchange-traded funds may be distributed to shareholders and treated as qualified dividend income by the shareholder. Prior to the Bush tax cuts, all dividend income was taxed as ordinary income. If Congress fails to extend these provisions, the qualified dividend income provisions will expire, and all dividends will once again be taxed as ordinary income. Most notably, taxpayers in the highest marginal income tax bracket who currently enjoy the 15 percent rate on qualified dividend income will be taxed at 39.6 percent for dividends received from the same issuer in 2013. Additionally, the 3.8 percent Medicare contribution tax discussed below will increase the effective rate of tax on dividend income for certain higher-income taxpayers to as high as 43.4 percent. The following table sets forth the scheduled rate increases.

Maximum Rates 2012 2013 2013 (including Medicare contribution tax)
Qualified Dividend Income 15% 39.6% 43.4%
Ordinary Dividend Income 35% 39.6% 43.4%

Planning Strategies. Because of the impending increase to tax rates applicable to dividends, owners of closely held corporations should consider declaring and paying a larger-than-normal dividend this year if the corporation has sufficient earnings and profits. Owners should carefully plan any such distributions, as distributions in excess of the corporation’s earnings and profits will reduce the shareholder’s stock basis and subject the shareholder to increased long-term capital gain taxable at potentially higher rates when the shareholder subsequently disposes of the stock. Owners of closely held corporations should consult their tax adviser to discuss dividend planning and other strategies such as leveraged recapitalizations to take advantage of the low rate currently applicable to qualified dividend income.

New Medicare Contribution Tax

A new 3.8 percent Medicare contribution tax on certain unearned income of individuals, trusts, and estates is scheduled to take effect in 2013. This provision, which was enacted as part of the Patient Protection and Affordable Care Act (PPACA), is scheduled to take effect regardless of whether Congress extends the Bush tax cuts. For individuals, the 3.8 percent tax will be imposed on the lesser of the individual’s net investment income or the amount by which the individual’s modified adjusted gross income (AGI) exceeds certain thresholds ($250,000 for married individuals filing jointly or $200,000 for unmarried individuals). For purposes of this tax, investment income includes interest, dividends, income from trades or businesses that are passive activities or that trade in financial instruments and commodities, and net gains from the disposition of property held in a trade or business that is a passive activity or that trades in financial instruments and commodities. Investment income excludes distributions from qualified retirement plans and excludes any items that are taken into account for self-employment tax purposes.

Planning Strategies. Until the Department of Treasury issues clarifying regulations, uncertainty remains regarding which types of investment income will be subject to this new tax. Taxpayers whose modified AGI exceeds the thresholds described above should consult their tax adviser to plan for the imposition of this tax. Specifically, business owners should discuss with their tax adviser whether it would be more advantageous to become “active” in their business rather than “passive” for purposes of this tax. Owners of certain business entities such as partnerships and LLCs should also consider whether a potential change to “active” status in the business could trigger self-employment tax liability. Investors in pass-through entities such as partnerships, LLCs, and S corporations should also review the tax distribution language in the relevant entity agreement to ensure that future tax distributions will account for this new tax.

Additionally, individuals will have a greater incentive to maximize their retirement plan contributions since distributions from qualified retirement plans are not included in investment income for purposes of the tax. While distributions from traditional IRAs and 401(k) plans are not included in investment income for purposes of the tax, they do increase an individual’s modified AGI and may push the individual above the modified AGI threshold, thus subjecting the individual’s other investment income to the tax. Individuals may also consider converting their traditional retirement plan into a Roth IRA or Roth 401(k) this year since Roth distributions are not included in investment income and do not increase the individual’s modified AGI. Although the Roth conversion would be taxable at ordinary rates, individuals should consider converting this year to avoid the higher ordinary rates scheduled to take effect in 2013.

Reduction in Itemized Deductions

Under current law, itemized deductions are not subject to any overall limitation. If the Bush tax cuts expire, an overall limitation on itemized deductions for higher-income taxpayers will once again apply. Most itemized deductions, except deductions for medical and dental expenses, investment interest, and casualty and theft losses, will be reduced by the lesser of 3 percent of AGI above an inflation-adjusted threshold or 80 percent of the amount of itemized deductions otherwise allowable. The inflation-adjusted threshold is projected to be approximately $174,450 in 2013 for all taxpayers except those married filing separately.

Planning Strategies. Because the overall limitation on itemized deductions will automatically apply to higher-income taxpayers, planning strategies are limited and highly individualized. Accelerating certain itemized deductions in 2012 to avoid the limitation may trigger alternative minimum tax (AMT) liability in 2012. Taxpayers should consult with their tax adviser to discuss the impact of this limitation and whether it may be advantageous to accelerate certain deductions, if possible, to 2012.

Reduction in Election to Expense Certain Depreciable Business Assets

Taxpayers may currently elect to expense certain depreciable business assets (Section 179 assets) in the year the assets are placed into service rather than capitalize and depreciate the cost over time. Section 179 assets include machinery, equipment, other tangible personal property, and computer software. Computer software falls out of this definition in 2013. The maximum allowable expense cannot exceed a specified amount, which is reduced dollar-for-dollar by the amount of Section 179 assets placed into service exceeding an investment ceiling. Both the maximum allowable expense and the investment ceiling will decrease next year, as shown in the table below.

2012 2013
Maximum allowable expense $139,000 $25,000
Investment ceiling 560,000 200,000

Planning Strategies. The change in law will both significantly decrease the dollar amount of Section 179 assets that may be expensed and cause the phaseout to be triggered at a lower threshold. Accordingly, business owners should consider placing Section 179 assets into service in 2012 to take advantage of the immediate tax benefit. Additionally, purchases of qualifying computer software should accelerated to 2012 if possible, as such purchases will no longer qualify for expensing in 2013.

AMT Preference for Gain Excluded on Sale of Qualified Small Business Stock

Taxpayers may exclude from their income all or part of the gain from selling stock of certain qualified C corporations that the taxpayer held for more than five years. The percentage of gain that may be excluded depends upon when the taxpayer acquired the stock (a 100 percent exclusion applies only to qualified stock acquired between September 28, 2010 and December 31, 2011). Under current law, 7 percent of the excluded gain is a preference item for AMT purposes. In 2013, this tax preference is scheduled to increase to 42 percent of the excluded gain (or 28 percent of the excluded gain for stock acquired after 2000). Gain excluded on stock for which the 100 percent exclusion applies will not be a tax preference for AMT purposes.

Planning Strategies. The increase in the percentage of excluded gain that will be treated as a tax preference for AMT purposes effectively eliminates the tax benefit of selling qualified small business stock. Those who are structuring a new business venture should reconsider forming a C corporation to take advantage of this provision, and should consult with their tax adviser to consider other entity choices. Owners of qualifying businesses who are considering selling their stock in the near future should also give additional consideration to a 2012 sale to take advantage of the current 7 percent AMT preference rate before the AMT preference rate increases in 2013.

Built-in Gains Tax Applicable to Certain S Corporations

Businesses that have converted from a C corporation to an S corporation are potentially subject to a corporate-level 35 percent built-in gains tax (BIG tax) on the disposition of their assets to the extent that the aggregate fair market value of the corporation’s assets exceeded the aggregate basis of such assets on the conversion date. In the case of fiscal years beginning in 2011, the BIG tax does not apply if the five-year anniversary of the conversion date has occurred prior the beginning of the fiscal year. However, in the case of fiscal years beginning in 2012 or thereafter, the BIG tax will not apply only if the ten-year anniversary of the conversion date has occurred prior to the beginning of the fiscal year.

Planning Strategies. Owners of S corporations that are still in their 2011 fiscal year and that are considering selling corporate assets (or stock if a Section 338(h)(10) election will be made) within the near future should consider selling in the current fiscal year, if possible, to the extent their conversion to S corporation status occurred more than five, but less than ten years prior to the beginning of the fiscal year. For example, a C corporation that converted to an S corporation at the beginning of its fiscal year commencing October 1, 2005 would not be subject to the BIG tax on any of its built-in gain if it sold assets at any time prior to September 30, 2012, but would be subject to the tax if it sold assets on or after October 1, 2012.

Other Changes Affecting Individuals

  • Additional employee portion of payroll tax. The employee portion of the hospital insurance payroll tax will increase by 0.9 percent (from 1.45 percent to 2.35 percent) on wages over $250,000 for married taxpayers filing jointly and $200,000 for other taxpayers. The employer portion of this tax remains 1.45 percent for all wages. This provision, which was enacted as part of the PPACA, is scheduled to take effect in 2013 regardless of whether Congress extends the Bush tax cuts.
  • Phaseout of personal exemptions. A higher-income taxpayer’s personal exemptions (currently $3,800 per exemption) will be phased out when AGI exceeds an inflation-indexed threshold. The inflation-adjusted threshold is projected to be $261,650 for married taxpayers filing jointly and $174,450 for unmarried taxpayers.
  • Medical and Dental Expense Deduction. As part of the PPACA, the threshold for claiming the itemized medical and dental expense deduction is scheduled to increase from 7.5 to 10 percent of AGI. The 7.5 percent threshold will continue to apply through 2016 for taxpayers (or spouses) who are 65 and older.
  • Decrease in standard deduction for married taxpayers filing jointly. The standard deduction for married taxpayers filing jointly will decrease to 167% (rather than the current 200%) of the standard deduction for unmarried taxpayers (currently $5,950). In 2012 dollars, this would lower the standard deduction for joint filers from $11,900 to $9,900.
  • Above-the-line student loan interest deduction. This deduction will apply only to interest paid during the first 60 months in which interest payments are required, whereas no such time limitation applies under current law. The deduction will phase out over lower modified AGI amounts, which are projected to be $75,000 for joint returns and $50,000 for all other returns.
  • Income exclusion for employer-provided educational assistance. This exclusion, which allows employees to exclude from income up to $5,250 of employer-provided educational assistance, is scheduled to expire.
  • Home sale exclusion. Heirs, estates, and qualified revocable trusts (trusts that were treated as owned by the decedent immediately prior to death) will no longer be able to take advantage of the $250,000 exclusion of gain from the sale of the decedent’s principal residence.
  • Credit for household and dependent care expenses. Maximum creditable expenses will decrease from $3,000 to $2,400 (for one qualifying individual) and from $6,000 to $4,800 (for two or more individuals). The maximum credit will decrease from 35 percent to 30 percent of creditable expenses. The AGI-based reduction in the credit will begin at $10,000 rather than $15,000.
  • Child credit. The maximum credit will decrease from $1,000 to $500 per child and cannot be used to offset AMT liability.
  • Earned Income Tax Credit. The phaseout ranges for claiming the credit, which vary depending on the number of qualifying children, are scheduled to decrease for joint returns. Further, the credit will be reduced by the taxpayer’s AMT liability.

Other Withholding Rate Changes
The following employer withholding rate changes will take effect in 2013:

2012 2013
Employee portion of FICA payroll taxes 4.2% 6.2%
Backup withholding rate on reportable payments 28% 31%
Minimum witholding rate under flat rate method…
…on supplemental wages up to $1 million 25% 28%
…on supplemental wages in excess of $1 million 35% 39.6%
Voluntary withholding rate on unemployment benefits 10% 15%

Foreign Account Tax Compliance Act

Regardless of whether Congress extends the Bush tax cuts, beginning in 2014, a new 30 percent withholding tax will be imposed on certain withholdable payments paid to foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) unless they collect and disclose to the IRS information regarding their direct and indirect U.S. account holders. FFIs include foreign entities that accept deposits in the ordinary course of a banking or similar business, that hold financial assets for the account of others as a substantial part of their business, or that are engaged primarily in the business of investing or trading in securities, commodities, and partnership interests. Any foreign entity that is not an FFI is an NFFE.

Withholdable payments will include U.S.-source interest, dividends, fixed or determinable annual or periodical income, and U.S.-source gross proceeds from sales of property that produce interest and dividend income. While the withholding obligation on withholdable payments to FFIs and NFFEs does not begin until 2014, FFIs will need to enter into agreements with the IRS by June 30, 2013 to avoid being subject to the withholding tax. In general, under such agreements, FFIs must agree to provide the IRS with certain information including the name, address, taxpayer identification number and account balance of direct and indirect U.S. account holders, and must agree to comply with due diligence and other reporting procedures with respect to the identification of U.S. accounts.

Depreciation and Changes in Use of Real Property

Depreciation and Changes in Use of Real Property



For income tax purposes, taxpayers that own rental property with gross receipts from residential or nonresidential uses should heed the rules on accounting for depreciation. This item discusses the distinction between residential and nonresidential property, depreciation, and the application of the change-in-use regulations if a rental property changes from residential use to nonresidential or vice versa.

Dwelling-Unit and Gross-Receipts Tests

Sec. 168(e)(2) defines residential rental property as any building or structure from which 80% or more of the gross rental income for the tax year is from dwelling units. Nonresidential real property is Sec. 1250 property that is not residential rental property or that does not have a class life of less than 27.5 years.

In determining whether a property meets the 80%-gross-receipts test to qualify as residential rental property, taxpayers may include in gross rental income the rental value of any portion of the building that they occupy. For hotels, motels, and other establishments, the 80%-gross-receipts test is disregarded if more than 50% of the dwelling units are used on a “transient basis.”

For purposes of defining residential rental property, “dwelling unit” means a house or apartment used to provide living accommodations in a building or structure, but it does not include a unit in a hotel, motel, or other establishment in which more than 50% of the units are used on a transient basis. Former Regs. Secs. 1.167(k)-3(c)(1) and (2), which were removed in 1993, provided that a dwelling unit was used on a transient basis if, for more than one-half of the days in which the unit was occupied on a rental basis during the taxpayer’s tax year, it was occupied by a tenant or series of tenants, each of whom occupied the unit for less than 30 days. If a dwelling unit was occupied subject to a sublease, the taxpayer looked to the sublessee to determine whether the dwelling unit was used on a transient basis.

The definition of dwelling units indicates that, under the right circumstances, properties such as nursing homes, retirement homes, and college dormitories can qualify as residential rental property as long as they do not run afoul of the transient-basis requirement. This assumes the 1993 definition of “transient basis” still applies, as the term still appears in Sec. 168(e)(2)(A)(ii)(I), which defines “dwelling unit.” In CCM 201147025, the Office of Chief Counsel cited Regs. Secs. 1.167(k)-3(c)(1) and (2) in determining that a taxpayer’s assisted-living facilities qualified as residential real property. Assuming a vacation home is subject to the transient-basis rules, the vacation home is classified as a residential rental property if the gross rental income test is met and it is rented to each tenant more than 30 days for more than 50% of the days in a tax year it is rented; otherwise, the vacation home would be classified as nonresidential real property.

Depreciation Methods, Periods, and Conventions

Sec. 167(a) permits a depreciation deduction for the exhaustion and wear and tear of property used in a trade or business or held for the production of income. Sec. 168 sets forth the methods, periods, and conventions by which a taxpayer can depreciate tangible property as permitted by Sec. 167(a).

In the case of residential rental property and nonresidential real property, Sec. 168(b)(3) states that the applicable depreciation method is the straight-line method. Sec. 168(c) states that the applicable recovery period is 27.5 years for residential rental property and 39 years for nonresidential real property. The applicable convention to be used for both residential rental property and nonresidential real property per Sec. 168(d) is the midmonth convention.

Certain property identified by Sec. 168(g) (tangible property that during the tax year is used predominantly outside the United States and certain other property) is depreciated under the alternative depreciation system (ADS). Residential rental property and nonresidential real property subject to the ADS is depreciated using the straight-line method, a recovery period of 40 years, and the midmonth convention.

Changes in Use

Because the gross rental income test is “for the taxable year,” the 80% test needs to be calculated annually. The difference in depreciation rates for residential rental property vs. nonresidential real property can be considerable.

Example: In January 2010, taxpayer X placed in service a building in New York state that met the 80%-gross-receipts test and the dwelling-unit requirement and had no transient-basis tenants. Therefore, the property met the definition of residential rental property and was depreciated using the straight-line method at an annual rate of approximately 3.6364% (12 months ÷ [12 months × 27.5 years]). (The annual depreciation rate is different in the first and last year the property is placed in service because of the application of the midmonth convention.)

In 2011, the property failed to meet the 80%-gross-receipts test and, thus, no longer qualified as residential rental property. Therefore, since the property is now nonresidential real property, it is depreciated using the straight-line method at an annual rate of approximately 2.5641% (12 months ÷ [12 months × 39 years]). (The annual depreciation rate is different in the first and last year the property is placed in service because of the application of the midmonth convention.)

Residential rental property is depreciated approximately 30% (1 – [2.5641 ÷ 3.6364]) faster than nonresidential real property. The difference can amount to a significant return on an investment via tax savings, but it also can be a big issue upon audit.

Regs. Sec. 1.168(i)-4 provides the rules for determining the depreciation allowance for MACRS property when the use changes in the hands of the same taxpayer. Use changes include when property is converted from personal property to business or income-producing use and vice versa, and when the change in the use results in a different recovery period and/or depreciation method. The allowance for depreciation under this section constitutes the depreciation deductions permitted under Sec. 167(a).

A change in the use of MACRS property occurs when the primary use of the MACRS property in the tax year differs from that of the immediately preceding tax year. The primary use of MACRS property may be determined in any reasonable manner that is consistently applied. If the primary use of MACRS property changes, the depreciation allowance for the year of change is determined as though the use had changed on the first day of the year of change.

If a change in use results in a shorter recovery period and/or a depreciation method that is more accelerated than the method used before the change in use, the taxpayer has two options: (1) The taxpayer can compute the depreciation allowance using the shorter and/or more accelerated depreciation method in the year the change in use occurred, or (2) the taxpayer may elect to continue determining the depreciation allowance as though the change in use had not occurred. These options provide a planning opportunity to suit a taxpayer’s need for more or less accelerated depreciation deductions. For example, a taxpayer with excess net operating loss carryovers might not be able to use the maximum depreciation deductions permitted and may want to use the longer, less accelerated depreciation method.

If a change in use results in a longer recovery period and/or less accelerated depreciation method than before the change in use, the taxpayer must compute the depreciation allowance using the longer and/or less accelerated depreciation method in the year the change in use occurred.

A change in computing the depreciation allowance in the year of change for property subject to Regs. Sec. 1.168(i)-4 is not a change in method of accounting under Sec. 446(e). To make the election or to disregard the election, a taxpayer needs only to complete Form 4562, Depreciation and Amortization (Including Information on Listed Property), in the year of change. However, the regulations under Secs. 446(e) and 481 apply if the taxpayer does not account for the depreciation allowance in the manner set forth by Regs. Sec. 1.168(i)-4 or revokes the election to disregard the change in use. If Secs. 446(e) and 481 do apply, the taxpayer should file a Form 3115, Application for Change in Account Method, to request an automatic change.

Property affected by the change-in-use regulations is not eligible for special depreciation deductions in the year of change, as otherwise permitted in Sec. 168(k) (bonus depreciation), Sec. 179 (election to expense certain depreciable business assets (generally not applicable to residential and nonresidential property)), and Sec. 1400L (tax benefits for New York Liberty Zone property). Additionally, for purposes of determining whether the midquarter convention applies to other MACRS property placed in service during the year, the change-in-use property is not taken into account.

Regs. Sec. 1.168(i)-4 also discusses the applicability of and options to use depreciation tables in the calculation, the rules to compute the new depreciation allowance, and assets subject to ADS.

Cost Segregation

Under the former investment tax credit (ITC) rules in Regs. Sec. 1.48-1(c), as interpreted by the Tax Court in Hospital Corp. of America, 109 T.C. 21 (1997), items in a building that qualify as tangible personal property may be separately depreciated under MACRS as personal property. Furthermore, the court held that if a building component is not personal property under the former ITC rules, it is considered a structural component and may not be depreciated separately. Therefore, a cost-segregation study identifying the structural components of specific units in a building to maximize depreciation would not be helpful to the owner(s) of a building that has tenants that use separate and identifiable units for business purposes and other units as their non–transient-basis dwelling units.

Under the temporary regulations in T.D. 9564 that apply to tax years beginning on or after Jan. 1, 2012, a taxpayer may retire a structural component of a building and use any reasonable method to allocate a cost to the component disposed of with respect to the larger asset, i.e., the building.


Many tax practitioners’ clients own one or more rental properties to which the above rules apply. Tax practitioners need to communicate continually with those clients that own rental properties with both residential and nonresidential receipts and test whether the property has changed use and the effect of the change on the clients’ tax returns.

2013 Tax Planning: 5 Reasons to Start Now

1. The 2013 Tax Season Is Closer than You Think


Industry experts generally agree that proper tax planning takes an average of six months – the time it often takes experts to educate themselves on all available opportunities, determine the best approach, and implement the plan. When you consider that six months from today puts us in March 2013, suddenly next year’s tax season doesn’t seem so far away. If you really want to get the best tax outcomes in 2013: the time to start planning is now.

2. Uncertainty Looms Over Next Year’s Tax Climate


Next year’s tax climate can be best characterized by its extreme uncertainty, which will be brought on by changes resulting from the Supreme Court upholding the Affordable Care Act, as well as by a number of provisions in the Bush tax cuts that are set to expire. This level of uncertainty will make early 2013 a chaotic time for tax planning, and it makes now an even more important time to get the planning process started.

3. You Could Still Benefit from Generous Tax Breaks that May Be Gone Next Year


With many provisions of the Bush tax cuts set to expire at year end, starting your 2013 tax planning now means you’ll still have a chance to take advantage of some breaks that may be history by year end. Rates are set to increase on federal income taxes (from 36 percent to 39.6 percent), long-term capital gains (from a maximum tax rate of 15 percent to 20 percent), and dividends (to be taxed as ordinary income). Waiting too long to plan for 2013 may cause you to miss out on some of these tax breaks for good.

4. The Estate Tax Is Set to Increase


Significant changes are also set to take place when it comes to the estate tax. This tax is set to increase from 35 percent this year to 45 percent next, and the lifetime exemption amount will go down from $5.12 million to $1 million – unless Congressional action is taken. These changes are likely to impact your plans for 2013, and they make it even more critical that you start the planning process immediately.

5. The Alternative Minimum Tax Will Greatly Expand its Reach


Another large tax provision certain to have an impact on many individuals is the higher Alternative Tax Exemption, or AMT patch. This exemption is set to drop from $74,450 this tax year to $45,000 next year. This means that not only will many more people have to pay the AMT patch, but the increase in taxable income will result in even more taxes that individuals pay next year. AMT may not have applied to you in the past, but this year, it may be one of many reasons for you to plan carefully for 2013.

“Regardless of what happens in Congress between now and the end of the year, people can still ensure economic stability for themselves and their future,” said Andrew Lattimer, a partner at BlumShapiro. “But the key is starting now by consulting your tax professionals while there is time to plan without being caught up in what is certain to be a chaotic early 2013.”


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