Important Notice Brian DiBella has left the firm. Gary Gomola and all of the other staff
members We are now at 213 Court Street, Suite 204,
Middletown CT 06457 CLIENT ALERT - FALL 2003The information contained in this newsletter is designed to keep our clients and friends informed of developments and ideas which we feel are important. Should any subjects be of interest please call one of us. The articles contained in this newsletter are not intended as a substitute for legal, accounting or tax advice. You should seek professional advice on the particular issues which concern you. Dividend Taxation For Small Business You have heard that the tax rate on
corporate dividends has been reduced to 15%. This
applies to dividends from your small C-Corporation as well as publicly traded companies. Should this change how you distribute funds from
your C-Corp? Or should you consider breaking your S-Corp election and go back to being a
C-Corp? The answer to the first question pretty
much answers the second. It all depends on tax
brackets. There are two ways for you to take
money from your C-Corporation; wages and dividends. We
have traditionally advised you to avoid dividends in a C-Corp and use salary, because
dividends get taxed twice. The double taxation
is still true but the rate has changed. The
lowest corporate tax rate is 15% (on the first $50,000 of income) and the personal
dividend rate is now 15% (assuming you have other sources of income or spousal wages). So the lowest
combined rate is 30% if you forgo wages. The
highest corporate tax rate is 39%. So the highest combined rate is 54% on dividends. Now we need to compare that rate to your
personal tax taking a salary. This is a little
harder due to the varying FICA tax rate, and the fact that the company portion of the FICA
tax is deductible. Assuming your salary is
fully subject to FICA (under $87,000) the combined employee and employer tax is about 15%. After that it’s about 3%. The personal income tax on wages can run from 15%
to 35%. So we are looking at a best case
combination of 18% and a worst case of 50%. Note
that this mathematical worst case is lower than the highest combined dividend rate of 54%
that we saw above, and the best case is well below the lowest combined dividend tax rate. We also need to consider that this
mathematical worst case on wages is not really a likely scenario. Anyone in the 35% personal income tax bracket
probably has wages already over the first level of FICA taxation and is only subject to
the 3% amount. So that’s now only a worst
case of 38% on wages, considerably below the highest dividend rate of 54%. And we need to consider the effects that lowering
your wages could have on your retirement plan contribution and other fringe benefits, plus
the risk of the IRS arguing unreasonably low compensation. If you have been closely following the math, you have probably observed that there are some combinations of numbers that will result in a lower dividend tax than wages, but these would be unusual scenarios. The only way to really know is to have us crank the numbers for you, which we would be glad to do for your given situation. This pretty much answers the second question. In most cases we do not think it makes sense to break an S-Corp election to start paying taxable C-Corp dividends. This is true based just on the tax rates on current income, not to mention the potentially huge double taxation you could face if the business was sold. Written by Gary R. Gomola, CPA, CVA - Partner garyg@ctcpas.com Depreciation Rules Change Again With the passage of the Jobs and Growth
Tax Relief Reconciliation Act of 2003, the depreciation rules have been further
liberalized. This article will summarize all
the changes made to the depreciation rules over the past two years and how you can best
utilize these changes. The initial depreciation changes came with
the passage of the Job Creation and Worker Assistance Act of 2002. These rules allowed taxpayers to claim an
additional 30% bonus first year depreciation for property with a recovery period of 20
years or less. This property had to be
acquired after September 10, 2001 and before September 11, 2004. Most types of new, non-realty property qualify for
this special depreciation allowance if the acquisition and placed-in-service requirements
are satisfied. The new 2003 act boosted the bonus first
year depreciation percentage from 30% to 50% for property acquired after May 5, 2003 and
before January 1, 2005. Taxpayers may elect to
claim 30% bonus depreciation instead of the 50% bonus depreciation or elect not to claim
bonus depreciation at all. Taxpayers also get
a bigger first year depreciation allowance for passenger autos that are qualifying
property. The new act increases the allowable
first year depreciation limits from $ 4,600 to $ 7,650 for qualifying autos eligible for
the 50% bonus depreciation election. This
amount is in addition to the normal regular depreciation deduction for luxury automobiles
which was capped at $3,060 for autos placed in service in 2002. Please note that this “bonus”,
or “additional”, depreciation is only an accelerated timing difference. By the end of the asset’s life the total
federal depreciation deductions will be the same whether or not the bonus depreciation is
taken. There has been a popular misconception
that this is an extra “gift” from the government, when in fact it is only a
deferral of taxes. So if you think you are
going to be in a higher tax bracket in the future you could pay more overall taxes if you
take the bonus depreciation. It is also very
important to consider that Connecticut does not allow this bonus depreciation. For C-Corporations the Connecticut difference is a
timing difference, while for S-Corporation and other pass through entities the difference
is permanent! Hence, for either or both of
these two reasons, in most cases we are recommending to elect out of the bonus
depreciation. For tax years beginning in
2003, 2004, and 2005, the new act
increases the section 179 expensing election deduction from $ 25,000 to $100,000 for
qualifying property (e.g. machinery, equipment, furniture, fixtures, etc.).This deduction
is phased out dollar for dollar to the extent total purchases of section 179 property
exceed $400,000, not $200,000 under the old rules. The
deduction will be reduced to $25,000 for tax years beginning after 2005. Under prior law, no computer software qualified for
the section 179 deduction because it was not "tangible" personal property.
The new act also allows off the shelf computer software to qualify for the
section 179 deduction. Off-the-shelf software
is, generally, software that is readily available for purchase by the general public. As of the date this newsletter was printed
Connecticut does appear to be allowing this increase in the expensing allowance for
depreciation. We will keep you informed of
developments in this area. We will work closely with you to take full advantage of the new rules to get maximum tax savings based on your particular situation. Written by Brian C. DiBella, CPA, - Partner briand@ctcpas.com Fiduciary Care in Not-For-Profits The members of our firm have some
important characteristics in common with our clients when it comes to the communities in
which we live and work. First, we understand
the importance of committing time and effort to charitable organizations whose missions
offer us an opportunity to “give back”. Second,
we possess abilities - financial, managerial, organizational, communication skills - which
are essential when charitable organizations look for volunteers to serve on their Boards
of Directors, and other committees. As a board
member, you have the honor of guiding the affairs of a not-for-profit organization,
representing the organization in the community, and assuring its reputation and integrity. You also have the responsibility to accomplish
those tasks in a responsible, prudent, and ethical manner.
How this is accomplished is best explained by starting with the concept of
accountability. The not-for-profit is accountable to a number of “customers”; the recipients of the organization’s services, donors, members, and staff. More importantly, most organizations are granted a tax-exempt status – the method by which the societal value of the organization’s services are recognized and the procedure whereby all taxpayers underwrite those services. This makes a not-for-profit accountable to every taxpayer and requires that the organization’s affairs be above reproach. Fiduciary is a legal term meaning trust. As a board member you are being entrusted with the
responsibility of managing property owned by another.
Because the people to whom we are accountable are more diffuse, there is a
danger that we’ll get the impression we’re not answerable for our actions,
we’re not responsible for what we don’t know, or that volunteer protection
statutes prevent directors from being sued. To ensure our actions comply with our
responsibility, we should carefully exercise the duties owed by a fiduciary: care and
loyalty. The duty of care requires that a director
be reasonably informed, participate in decisions, ask questions, exercise independent
judgment, and attend meetings. Connecticut
statutes state that a director shall discharge his duties in good faith, with the care an
ordinary person would exercise, and in a manner he believes to be in the best interest of
the organization. A director is entitled to rely on information prepared by the officers,
employees, legal or financial professionals, or committees of which he is not a director
if he believes such reliance is warranted. The
Volunteer Protection Statute provides that a director shall be immune from civil liability
if such person acted in good faith and within the scope of his official duties. The duty of loyalty requires a director ensure his interest is centered on the organization; there should be no undisclosed conflicts of interest. The penalties which may be assessed to a person benefiting from such a conflict, or directors who approve such transactions, are addressed by Connecticut statutes. A director must also be aware of the potential for conflict such as using for his own benefit an opportunity which would otherwise benefit the organization. Above all, the director must maintain confidentiality. Before accepting a position such as this, you may want to have a discussion with your personal attorney. The best rule for actions taken as a board member is to always remember that the relationship of your not-for-profit to its beneficiaries, supporters, and society is based on trust, not commerce. Written by Robyn M. Sparks, CPA robyns@ctcpas.com IRS Gets It Wrong Half Of The Time According
to a study released by the Treasury Department in September, IRS service centers gave
incorrect, or no answer at all, to 43 percent of questions asked by investigators posing
as taxpayers. The investigators concluded that
about half a million taxpayers were given wrong information during a six month period in
2002. Investigators
were given correct, or partially correct, answers to their tax law questions only 57
percent of the time. Questions were answered
completely and accurately only 45 percent of the time!
In 12 percent of the cases information that was given was correct but
incomplete. IRS employees gave completely
wrong answers to 28 percent of the questions, and 12 percent of the time the investigators
were told to do their own research in Internal Revenue Service publications. In 3 percent of the
inquires the taxpayers got no response at all. The
results were different depending on the area of the country.
The best answers were given in the Northeast, while the Midwest and Plains
service centers had the worst. The tax law
areas with the highest error rate were those related to the earned income credit,
education credits, and dependency exemptions. Studies
like this have been done by private organizations many times over the years. However this study was done by Treasury Department
employees, who did not work for the IRS. The
Internal Revenue Service is one of several divisions of the Treasury Department. Senate
Finance Chairman Charles Grassley said “The IRS failing grade here is unacceptable. It’s especially discouraging that the IRS is
often giving wrong answers to questions which benefit low-income taxpayers.” The IRS disputed the results, and in recalculating
the error rate ignored the cases were the investigators were told to do their own
research, or were denied service. These
recalculated results showed a 67% success rate. IRS
Commissioner Henry Lamar said “We recognize that an accuracy rate of 67 percent for
tax law service is inadequate”. Written by Tanis M. Crosby, CPA taniac@ctcpas.com The articles contained in this newsletter are not intended as a substitute for legal, accounting or tax advice. You should seek professional advice on the particular issues which concern you. Edited by Gary R. Gomola, CPA, CVA October 2003 Home | About Us | Our Staff | Newsletters | Links |
