Dear Tax Clients:

 As the 2011 tax year comes to a close, now is the time to review your financial situation and determine what tax planning opportunities exist to decrease your 2011 taxes.  We are ready to help you plan efficiently and effectively for 2011 and future years.  

Individual Income Tax 

While the lower Bush era tax cuts are currently not scheduled to expire until the end of 2012, there are still year-end tax savings opportunities available.  The additional twist for year-end 2011 tax planning is the uncertain future for tax rates after 2012.  Many political observers forecast that higher income taxpayers will only be asked to pay more. 

Year End 2011 Action Items: 

Make your 2011 State Income Tax payments in December 2011, instead of waiting until January 2012, unless you are in an AMT situation. 

Sell any stock “losers” this month to offset your 2011 capital gains, plus $3,000.  Avoid “wash sale” rules by not buying the same stock within 30 days before or after the sale of the stock.  Otherwise, the losses will not count. 

Has your 2011 Federal Income Tax been under-withheld?  Or have you had other income and not made estimated tax payments?  Have more tax withheld from your December paychecks.  This will avoid underpayment penalties. 

If you are 70 ½ and older, you can make charitable contributions directly from your IRA to a bona fide charity. No charitable deduction is available for the donation, but income tax will not be due on what would otherwise be a taxable distribution form the IRA.  This tax break is especially advantageous for retired taxpayers who are no longer able to itemize their deductions.  The limit is $100,000 and it is scheduled to expire at the end of this year. 

Consider converting your traditional IRA to a Roth IRA.  You would owe tax on the IRA amount currently, to the extent it exceeds basis, but retirement distributions from the Roth IRA would potentially be tax free – especially advantageous since it is expected that tax rates will increase after 2012. 

Provisions currently scheduled to expire 12/31/2011:  

Payroll Tax – For the 2011 tax year, the employee share of Social Security Tax withholding was reduced from 6.2% to 4.2% of the taxable wage base of $106,800.  This reduction is scheduled to expire at the end of the year.  President Obama has proposed a measure that would continue the payroll tax deduction for 2012 at an even lower rate of 3.1% of the scheduled 2012 taxable wage base of $110,100.  This new measure has not yet become law and is currently under debate in Congress. 

Alternative Minimum Tax Exemption – In order to prevent many moderate income tax payers from being subject to the AMT, the exemption amounts for 2011 were increased to $48,450 for single taxpayers and $74,450 for married taxpayers filing jointly and surviving spouses.  Unless Congress acts to extend the higher exemption amounts, the exemption for 2012 and beyond will decrease to $33,750 for single taxpayers and $45,000 for jointly filing married taxpayers and surviving spouses. 

Provisions currently scheduled to expire 12/31/2012: 

Federal Income Tax Rate Brackets – The current tax rates of 10, 15, 25, 28, 33 and 35% are scheduled to expire 12/31/2012.  If they were allowed to expire, the rates for 2013 and future years would revert to the “pre- Bush tax cut” rates of 15, 28, 31, 36 and 39.6%.  

All indications at this time are that President Obama supports extending the tax rate cuts, except to the highest tax brackets starting at $250,000 for married filling jointly taxpayers and $200,000 for all other taxpayers. The Republicans continue to only support an extension of the lower Bush-era rates across-the-board to all taxpayers.  This will continue to be a hotly debated issue in Washington.  We will keep you informed as new developments continue to unfold. 

Capital Gains/Dividends – In 2011 and 2012, qualified capital gains and dividends are taxed at a maximum rate of 15%.  Unless this provision is extended, the maximum rate on net capital gains would increase to 20% in 2013.  All dividends would be taxed as regular income, and therefore, could be subject to the maximum rate of 39.6%. 

Limit on Itemized Deductions – Unless the Bush tax cuts are extended, higher-income taxpayers will revert to a limitation on itemized deductions in excess of a statutory threshold of adjusted gross income.  There would also be a similar limitation on personal exemptions for high-income taxpayers. 

Marriage Penalty Relief – The provisions currently in place to mitigate the “marriage penalty” for two income couples will expire at the end of 2012. 

Small Business Tax 

Bonus Depreciation  – The bonus depreciation percentage for the cost of new equipment, including computers and software, purchased and placed in service in 2011 will be 100%.  The bonus depreciation rate is scheduled to drop to 50% in 2012. 

Action Item: Accelerate planned equipment purchases to December and you will be able to deduct the entire cost of the equipment on your 2011 tax return. 

Hiring Incentives for Veterans – The Returning Heroes Tax Credit and the Wounded Warriors Tax Credit were recently enacted on November 21, 2011.  Under this new law, employers are eligible for a tax credit when hiring certain qualified military veterans.  This provision is currently scheduled to expire on 12/31/2012.

Action Item: A certification form must be filed with the state workforce agency within 28 days of the employment date to certify that the individual is eligible for the Work Opportunity Tax Credit. 

From 1099 Reporting – There are new questions on this year’s Schedule C (Profit or Loss from Business) and Schedule E (Supplemental Income and Loss) regarding the 1099 reporting of certain payments made to individuals in the course of your trade or business.  IRS is asking taxpayers if they had any payments that would require 1099 reporting and if yes, were all required forms filed.

Action Item:  Confirm that you are in compliance – Penalties can add up quickly. 

Federal Estate and Gift Tax 

The current estate tax for 2011 is set at a maximum 35% rate and a $5 million exclusion.  For 2012, the maximum rate remains the same at 35% and the inflation-adjusted exclusion is $5.120 million.  Absent future legislation, after 2012, the exclusion amount will be $1 million with a maximum 55% rate. However, many experts are predicting that Congress will lower the exclusion to $3.5 million and raise the maximum rate to 45% after 2012. 

Action Item:  Lifetime gift giving should continue to be part of your master estate plan.  Individuals can currently gift up to $13,000 per year and married couples can gift up to $26,000 per year, to each individual gift recipient free of any gift tax. 

Other Items 

IRS “Phishing” Scams – The IRS continues to be diligent in their efforts to protect taxpayer information and “shut down” scams as quickly as possible.  They stress that the IRS does not solicit taxpayer information via e-mail.  Any emails received from the “IRS” requesting personal information should be deleted. 

Audits of Tax Returns – There has been an increase in audit and notice activity related to clients’ Individual Income Tax Returns (Form 1040) over the past couple of years.  As the federal government continues to struggle financially, the audit/notice activity for Estate and Trust Tax Returns (Form 1041) is also starting to increase.  This includes the assessment of severe non-filing penalties in cases where tax returns have not been properly filed.  It should be noted that tax returns are required to be filed even if no tax is due.  We are ready to help if you have any issues in this area. 

Health Care Directives – Once a child turns 18, a parent/guardian’s access to medical records is terminated.  Therefore, if you have young adult children, it is advisable for them to execute and Advanced Health Care Directive naming you (or someone they trust) as their personal representative so that these records do not become blocked from access. 

Health Care Act

 Small Business Tax Credit – Currently a tax credit is available to qualified small employers to help offset the cost of employer provided health insurance coverage. 

Medicare Payroll Surtax – Effective 2013 the law currently contains provisions for imposing an additional Hospital Insurance tax of .9% on earned income in excess of $200,000 for individuals and $250,000 for married couples filing jointly.  An additional 3.8% Medicare contribution tax is imposed on unearned income for higher-income taxpayers. 

Estates and Trusts – The 3.8% tax is also imposed on certain estates and trusts. 

Medical Expense Deduction – The threshold for the itemized medical deduction will increase after 12/31/2012.  However, individuals who are 65 and older will be exempt from this increase through 2016. 

State of Georgia Changes

 Individual Income Tax Retirement Exclusion – The income tax exclusion on retirement income, for taxpayers who are 65 or older, increases from the current $35,000 of retirement income to the following:

 2012        $ 65,000

2013        $100,000

2014        $150,000

2015        $200,000

2016        Unlimited

No need to move to Florida – Georgia is increasingly becoming a retiree friendly State.

Individuals who are ages 62 through 64 are still entitled to the $35,000 individual tax exclusion on retirement income.

Happy Holidays!

While that state has stricter independent contractor restrictions than Georgia, many states are looking to increase fines for mischaracterizing employees to help with revenue shortfalls.   Clients with operations outside of Georgia must be very careful of how they classify workers.  Further, at least 39 states have entered into agreements with the Internal Revenue Service to share data on employee misclassification.

The main test that Georgia uses to determine whether a worker is an independent contractor instead of an employee is the control test.  The more the employer controls many details over the worker’s work, the better the chance that worker will be considered an employee under state law.  Employees will be subject to tax and worker’s compensation ramifications while the regulations on independent contractors are significantly less stringent.

There are numerous other factors Georgia courts look to in determining whether a worker is an employee or an independent contractor, including the duration of the project, whether the employer supplies the tools and location for the project, and more.

If you would like us to review your current employment situation or have any questions about employees vs. independent contractors, do not hesitate to give us a call at Hoffman & Associates.

Once executed, beneficiary designations should be reviewed every couple of years, particularly after life changing events such as marriage, divorce, or the birth or death of a family member.  Failure to do so can be catastrophic.  For example, in Kennedy v. Dupont, a 2009 U.S. Supreme Court case, a participant selected his wife as the sole designated beneficiary of his retirement plan account.   The couple divorced and the spouse waived her right to the retirement benefits under the divorce decree.  The participant later passed away, but never changed the designated beneficiary form.  The Supreme Court found that the ex-spouse had the right to receive the death benefit from the participant’s account despite her waiver.    

If you would like help regarding the tax and other consequences of choosing a designated beneficiary, please contact Joe Nagel at (404) 255-7400 ext. 16.

***UPDATE: The United States Supreme Court has upheld an Arizona statute requiring that business use the federal E-Verify database to screen new hires similar to Georgia’s HB87!***

On May 13, 2011, Georgia Governor Nathan Deal signed House Bill 87 into law. HB 87 is designed to tackle a litany of immigration issues facing the state. Of particular importance to Georgia businesses, HB87 will require almost all Georgia employers to use the federal government’s “E-Verify” system for all new hires by the end of 2012. To enforce this new law, every business will now have to submit an affidavit regarding compliance with E-Verify to its local government before that business can obtain or renew its business license or occupational tax certificate. In essence, failure to properly comply with the E-Verify system could cost you the ability to do business in your community.

E-Verify is an Internet based system operated by the U.S. Citizenship and Immigration Services which employers can use to verify the employment eligibility of employees. E-Verify checks an employee’s I-9 information against the records of the Department of Homeland Security and the Social Security Administration. If the E-Verify query results in a “tentative non-confirmation”, the employee may contest the finding and has eight government business days to contact Homeland Security or Social Security. During this eight-day buffer, the employer may not take adverse action with respect to the employee.

In Georgia, the E-Verify system will be implemented in stages depending on the number of full-time employees within a particular business. A “full-time” employee is an individual who works in the business 35 hours or more per week. If you are a private employer with more than 500 full-time employees, you must register for E-Verify by January 1, 2012. If you have more than 100 full-time employees, you must register for E-Verify by July 1, 2012, and if you have more than 10 full-time employees, you must register for E-Verify by January 1, 2013.

Almost all business potentially face scrutiny under this new law. If we can be of help ensuring you do not run afoul of the emerging employment issues, please contact us at (404) 255-7400.

The new law is not retroactive.  It will not apply to non-competes entered into before November 2, 2010.   So if employers want to take advantage of the new law, they should update their non-compete agreements and non-disclosure/confidentiality agreements now.

The new law offers many advantages for employers.

• The new law allows courts to adjust or “blue pencil” overly broad covenants to make them reasonable and enforceable.  Previously, a court didn’t have this discretion – if the covenant was overly broad for any reason, no matter how minor, the covenant was held to be totally unenforceable.

• The new law allows employers to identify specific competitors as prohibited employers during the period of the non-compete.

• The new law provides that post-employment restrictions are enforceable if they give “fair notice of the maximum reasonable scope of the restraint… event if the description is generalized or could possibly be stated more narrowly to exclude extraneous matters”.  The statute also specifically provides a good faith safe harbor for “any good faith estimate of the activities, products and services or geographical areas that may be applicable at the time of termination”.  So now the employer may make reasonable assumptions about the role and geographical area of the employee at the outset and the non-compete will not be struck down as overly broad if those assumptions turn out to be mistaken.

• The new law includes a provision stating that trade secrets and other confidential information are legitimate business interests which support non-compete covenants.

• The new law provides that a restrictive covenant during the term of employment will not be  unreasonable because it lacks any specific limitation upon scope of activity, duration, or geographical area as long as it promotes or protects the purpose or subject matter of the agreement or relationship or deters any potential conflict of interest.    Previously, that was not the case in Georgia  –  covenants during the term of employment were subject to strict scrutiny just like those applying after the term of employment.

• The new law does away with Georgia’s “all or nothing” approach.  Under the old rules, if one part of an employment agreement contained an unenforceable restrictive covenant, all other restrictive covenants in the agreement were unenforceable.  This is no longer the case.

• The new law allows confidential information to remain protected as long as it remains confidential.  Previously, Georgia was one of two states that required a non-disclosure agreement to have a time limit, except as relates to trade-secrets.   Under the new statute confidential information is not required to have an expiration date.

If you have questions or want to update your non-compete agreement, please contact Joe Nagel, Marc Dearth or Patrick Norris at (404) 255-7400.

1.  Have a profit sharing plan?  You can convert to Roth IRA!

Many clients have profit sharing plans and non-traditional IRAs.  Luckily, those clients may amend their profit sharing plans to allow early in service distributions to IRAs.  There are specific rules regarding the in service distribution.  Generally, the distribution must consist of money placed in the profit sharing plan at least two years prior, and the client must have been a plan participant for at least five years.   Once the plan is amended, the client may distribute to an IRA, and make a Roth conversion!

2.  You can go back in time to reduce taxes on conversion!

Suppose a 60 year old client has $1,000,000 in a traditional IRA.  On January 1, 2010, client converts IRA to Roth IRA, resulting in an additional $1,000,000 of income on the 2010 return.   Fearing that income tax rates will be higher in the future, he chooses not to spread the additional income taxes over the permitted 2 year period.  With a marginal tax rate of 35%, client files tax return on April 15, 2011 and pays additional taxes of $350,000.

On or before October 15, 2011, the Roth IRA account has gone down in value from $1,000,000 to $500,000.  Thus, client has lost much of the benefit of conversion.  However, client can amend his 2011 return to convert back to traditional IRA, and receive a refund of $350,000.  Client can then re-convert back to Roth IRA on January 1, 2012.  Upon re-conversion, account is now worth $500,000, so income tax would only be $175,000.  Thus, client is not locked in on January 1, 2010 – if the account goes down in value, he can amend his 2010 return and utilize losses to reduce income taxes on conversion!

3.  Segregation of IRA account offers even more opportunity to minimize taxes!

Suppose 60 year old client has $1,000,000 in a traditional IRA, consisting of $200,000 of stock 1, $200,000 of stock 2, $200,000 of stock 3, $200,000 of stock 4 and $200,000 of stock 5.   Client converts his one IRA account to 5 Roth IRA accounts (one for each separate stock).  Fearing that income tax rates will be higher in the future, he chooses not to spread the additional income taxes over the permitted 2 year period. Client has $1,000,000 of additional income, and pays $350,000 of additional taxes on conversion.

On or before October 15, 2011, stocks 1 and 2 go down in value to $100,000, stock 3 remains the same, and stocks 4 and 5 go up in value to $140,000.   Client can re-characterize Roth IRA accounts 1 and 2, resulting in a refund of $150,000 by filing an amended return.  Client could then re-convert those accounts on January 1, 2012, paying taxes of $75,000 (on $200,000 of income).

In this way, clients can minimize taxes on each separate and distinct asset/stock upon conversion.

If you would like more information on the conversion of a Traditional IRA to a Roth IRA, please call or email Hoffman & Associates today.

404.255.7400

]]> http://www.hoffmanestatelaw.com/roth-ira-conversions-additional-planning-considerations/feed/ 0 http://www.hoffmanestatelaw.com/georgia-covenants-not-to-compete-between-franchisors-and-franchisees/ http://www.hoffmanestatelaw.com/georgia-covenants-not-to-compete-between-franchisors-and-franchisees/#comments Wed, 04 Nov 2009 23:00:46 +0000 Joe Nagel http://www.hoffmanestatelaw.com/?p=382 As is customary of the industry, franchisors typically require franchisees to enter into agreements containing non-competition provisions. In Georgia, these provisions can be extremely difficult to enforce, and both parties are best advised to seek counsel.

Gandolfo’s Deli Boys, LLC v. Holman is a recent case which illustrates Georgia’s strict analysis of non-competition provisions and its attitude towards choice of law provisions.  In the case, Gandolfo’s was a restaurant franchisor marketing hot and cold deli sandwiches and related food and beverage products.   The franchisor and its Duluth, Georgia franchisee entered into an agreement containing a noncompetition covenant prohibiting the franchisee from operating a “competitive business” at its site, within 10 miles of its site, and within 10 miles of any of Gandolfo’s restaurants.   The covenant was to be governed by Utah law despite the franchisee’s location in Duluth.

The court found the non-competition covenant at issue was unenforceable under Georgia law; therefore applying the “choice of law provision” selecting Utah law would contravene Georgia public policy.

Under Georgia law, franchise agreements are analogous to employment contracts, and covenants not to compete receive strict security and are not blue-penciled (i.e., the court will not “blue pencil” the provision by striking overly broad provisions of the covenant and upholding the remainder).   A non-competition covenant entered into in connection with a franchise or employment contract is enforceable only where it is strictly limited in time and territorial effect and is otherwise reasonable considering the business interest of the employer sought to be protected and the effect on the franchisee.

Applying the above standards to the case, the court found the non-competition covenant at issue unenforceable for the following reasons: (1)  The covenant prohibited the former franchisee from employment in a competing business “in any capacity”, including owner, officer, employee, or otherwise; (2) The covenant’s definition of competitive business unreasonably restricted the franchisee from opening a broad array of restaurants, including those that do not target the same customers or compete with Gandolfo’s; (3)  The territorial restriction prohibiting the franchisee from operating within 10 miles of any other Gandolfo’s restaurant was not strictly limited because it was capable of expanding and changing and could not be determined until the contract terminated;  and (4) The territorial restriction prevented the franchisees not only from doing business in areas in which it had actually done business, but also in areas where only Gandolfo’s and its other franchisees conduct business.

As demonstrated by the above case, non-competition covenants between franchisors and franchisees must be drafted very precisely to withstand a court’s scrutiny in Georgia. Both parties are advised to retain legal counsel to tailor the language for their specific circumstances.

If you would like more information on the application of non-compete covenants, please call or email Hoffman & Associates today.

Those who wish to participate for the 2010 tax year must submit the tax credit application to the State Revenue Commissioner by October 31, 2009.  Employers will be informed by December 31, 2009 as to whether their application has been accepted.   If accepted, the employer can then make 2010 outlays for their tele-working program with confidence that they qualify for the tax credit.  If the total amounts of credits requested by all taxpayers exceed $2.5 million dollars, then the funds will be dispersed among employers on a pro-rata basis. 

To learn more about the qualifying for the Georgia tele-working tax credit, please call or email Hoffman & Associates today.

404.255.7400

In the 2005 case, Crescent Miami Center, LLC v. Florida Department of Revenue, the Florida Supreme Court announced that a transfer of unencumbered property (property not subject to a mortgage) to a wholly owned subsidiary where nothing of value is exchanged is not subject to Florida’s transfer tax.  This decision allowed taxpayers to transfer a property to a wholly owned L.L.C. then transfer the interest in the L.L.C. to a buyer without ever paying the transfer tax.  This has been referred to as a “drop and swap” technique to avoid the Florida transfer tax.  The effect on transfer tax collection in the wake of this decision was profound.

The new law eliminates this “drop and swap” technique.  The law provides that where a property is transferred without full consideration (payment of money, property or mortgage) to a wholly owned entity, the entity will be considered a “conduit entity”.  If an interest in the conduit entity is transferred within three years of the original transfer, the transfer tax will be due at the customary rate.  The new law only applies to transfers to a conduit entity after July 1, 2009.

The new law exempts out transfers for estate planning purposes, such as gifts of an interest in a conduit entity or a transfer of an interest in a conduit entity to an irrevocable grantor trust for estate planning purposes.

The transfer tax laws have changed drastically over the last few years.  The new law is the latest incarnation to apply to the transfers of real property.

If you would like more information on the Florida Documentary Stamp Tax, please call or email Hoffman & Associates today.

404.255.7400