Impacts of the JOBS ACT by Carolyn Flaherty

The Jumpstart Our Business Startups Act, known as the JOBS Act allows middle market company investment opportunities such as:

• raising small amounts of money using the Internet
• staying a private company longer and raising money in private placements from sophisticated investors
• raising significant sums of money, up to $50 million, in a 12-month period in a new Regulation A+ hybrid offering mechanism
• Tapping the U.S. capital markets in an initial public offering sooner than management may have considered

The JOBS Act also creates an “on-ramp” for middle market, non-public companies to access the IPO markets by easing accounting and reporting requirements for qualified emerging growth companies, (ECG). An emerging growth company is a company with less than $1 Billion that issues new common equity after December 8, 2011.

As a result of the JOBS ACT emerging growth companies are:

• Exempted from the requirement to have auditor reporting on their internal control systems
• Exempted from adopting new or revised accounting standards until the effective date of such standards for nonpublic companies
• Not generally subject to future PCAOB rules that require mandatory audit firm rotation or a supplement to the auditor’s report unless the SEC determines that the application is necessary for the public interest
• Allowed to present only two rather than three years of audited financial statement in the initial registration statements
• Exempted from requirements from certain Regulation S-K disclosure information
• Allowed an increased exemption limit for small offerings under Regulation A
• Able to enjoy scaled executive compensation disclosure

In addition emerging growth companies have the benefits of being able to file confidential submission drafts of registration statements to the SEC before filing and can also test the IPO waters by communicating with potential investors before a registration statement is filed.

Once a company achieves ECG status, the company can maintain this standing for up to five years after closing its first sale of common equity or until the occurrence of one of the below listed events (whichever is earlier):

• The last date of the fiscal year with gross revenues over $1 billion
• The date where over the previous three-year period $1 billion in nonconvertible debt has been issued
• The date on which the issuer is deemed a large accelerated filer

HIGH INCOME TAXPAYERS WILL BE IMPACTED BY THE ADDITIONAL MEDICARE TAX IN 2013 by Karla Hopkins

There are two parts to this new provision.  The first is a .9% increase in the employee portion of Medicare tax withheld on wages over a certain threshold amount.  The second part is an additional 3.8% tax on the lesser of unearned income or modified adjusted gross income over a threshold amount.

The threshold amount for both provisions is $250,000 for a joint return and $200,000 for a single return.  This means that an employer is obligated to withhold the .9% Medicare tax only on a person’s wages in excess of $200,000 (disregarding spousal wages). 

The 3.8% tax is on the lesser of the net investment income or the amount by which a modified adjusted gross income exceeds a threshold amount.  Thus individuals whose modified adjusted gross income does not exceed the threshold are not subject to this tax and individuals whose modified adjusted gross income does exceed the threshold are subject to the tax but only on their net investment income.

Net investment income includes:

·         Passive trade or businesses

·         Other nonbusiness passive income like interest, dividends, rents

·         Disposition of property ( i.e. net gain)

Income from retirement accounts are not considered net investment income for this tax.

Both of these taxes must be considered when planning your 2013 estimated income tax requirements. Proper planning may allow a taxpayer to develop a scenario for avoiding the tax all together.  When planning you could consider: bunching your income into every other year instead of each year, investing in growth instead of income paying stocks to minimize dividend and interest income, sharing wage income with a spouse or child, paying distributions instead of wages from an S corporation etc.  While there could be many tools, each plan is specific to a certain set of circumstances for each taxpayer.

WHO DEDUCTS THE MORTGAGE WHEN THERE ARE MULTIPLE OWNERS by Karla Hopkins

Due to the difficult economy, many individuals are having difficulty obtaining a loan for a new or a refinanced current home.  An alternative for many has been to tap into the credit worthiness of parents or other family members.  In which case, the debt is obtained by and in the name of, a family member with the understanding of the parties that the occupants of the home will be responsible for the monthly mortgage payment.  The question is: who deducts the mortgage interest? 

Qualified mortgage interest is deducted with respect to acquisition or home equity indebtedness with respect to any qualified residence of the taxpayer.   Qualified mortgage interest is debt incurred to acquire, construct or improve a qualified residence of the taxpayer and is secured by such residence.

In most instances, interest can be deducted only by the person that is legally responsible for the debt.  Therefore if a family member enters into an agreement with another family member for the debt on his home, the interest deduction could be lost.  There is a potential exception to this limitation however. 

If interest is paid on a mortgage which a person is the EQUITABLE OWNER of even though not directly responsible for the debt, he may deduct the interest paid.

Taxpayers who are considering using another party to assist them and ultimately hold the debt on their residence should be thoughtful of the tax rules when setting up the arrangement.  They should carefully structure a written, enforceable agreement that clearly identifies them as equitable owners of the property and assigns to them the corresponding burdens and benefits.  The written documentation will help them demonstrate their intent for ownership.  Then, the key is to act consistently in keeping with the agreement.  In other words, make all of the mortgage payments, pay all expenses relating to the property, and be the sole occupants.  If you treat the home as your legal home, it is likely the tax courts will also.

Estate Planning for the International Taxpayer by Karla Hopkins

It is essential for people with multiple citizenship and/or residency to understand that the timing and manner of wealth ownership, transfers and growth can affect their tax burdens.

Questions to ask:

Is a donor a U.S. citizen or domiciled in the U.S.?
If either are true, all gifts made and assets owned worldwide at death are subject to U.S. transfer tax in the absence of a relevant tax treaty. In addition, even if the individual has no connection to the U.S. but passes away with certain types of property located in the U.S. the estate tax applies to the U.S. assets regardless of citizenship or residency unless a treaty exemption applies.

What creates U.S domicile for estate and gift purposes?
According to the IRS, a person can establish domicile by living in a place for even a brief period with no definite, present intention of moving. However this test requires a facts and circumstances analysis which includes factors such as citizenship in another country, location of investment assets, driver’s registration, bank accounts, homes etc. Domicile is separate from Income Tax Residency therefore it is possible to acquire income tax residency without becoming domiciled in the U.S. for estate and gift tax purposes.

If beneficiaries of a gift or bequest are located in the U.S. and the donor is not a U.S. citizen or with a U.S. domicile, must U.S. transfer taxes be paid?
In almost all cases the answer depends on the location of the transferred assets, not the location of the beneficiary. Gifts of real property located in the U.S. would be a type of asset subject to the U.S. transfer tax even for a nonresident. Gifts of intangibles, including stock, to a beneficiaries located in the U.S. from a nonresident would not be subject to U.S. transfer tax. Nonresident aliens who make gifts subject to U.S. transfer tax are not eligible for the unified credit either. The $13,000 exclusion is allowed thus a nonresident alien is only allowed the equivalent of $60,000 lifetime exclusion compared to the $5.12 million in 2012 for U.S. citizens and domiciled residents.

What are the benefits of an estate treaty?
Unless an estate/inheritance or gift tax treaty applies, lifetime transfers and all assets owned at death by a person domiciled in the U.S. who is a citizen of another country are subject to U.S. taxes and his or her country’s tax. Currently 16 countries have estate tax treaties or a combined estate and gift tax treaty with the U.S. Some of these include, France, Germany Ireland, Italy, Japan and the United Kingdom. The general purpose of these treaties is to avoid double taxation. However each treaty is different and can apply their provisions differently regarding the situs of property and the domicile of the taxpayer. In addition, there is a limit to the use of a treaty for preferential treatment if a person has lived for a significant period of time in the U.S. Longer term residents will not be eligible for relief under a treaty.


What are the implications of transfers to a Non U.S. Citizen spouse?
Even if U.S. domicile has been established and the taxpayer is allowed the full unified credit the tax law does not allow the unlimited marital deduction for spouses who are not U.S. citizens, with a few exceptions. So in addition to potentially all assets of a U.S. domiciled foreign person being subjected to U.S. estate tax, if there is no applicable estate tax treaty, the taxpayer cannot benefit from a full marital deduction unless the spouse is a U.S. citizen. Considering the lower tax rates in many countries such as Brazil, China, and Venezuela or even where there are no estate taxes, establishing domicile in the U.S. can be costly.

Other considerations include:
Many European Union countries have a forced heirship system which must be considered. This may require specific beneficiaries as a matter of law and could cause U.S. estate plans for foreign citizens to be problematic.

Many continental European countries along with many Latin American countries follow a community law system. International treatment of community property can bring up a variety of conflicts of laws too.

As a result of the possibly significant transfer tax issues that a global taxpayer could face, it is important to seek professional help from attorneys and CPA’s who are knowledgeable in this area and who can consult with professionals from the initial country of citizenship.