SANTA ROSA — Business owners, particularly the wine industry that makes up a significant proportion of the North Coast economy, need to pay attention to major health care insurance, tax and estate law changes this year to avoid steep noncompliance penalties and mitigate significant tax increases, according to local tax-planning and insurance experts.
Mike Parr, employee benefits broker with Northwest Insurance agency, a subsidiary of George Petersen Insurance, focused on how business owners should prepare for health care reform at a recent roundtable on wine industrial financial issues hosted by accounting firm Moss Adams LLP.
“There are positive aspects of the new health care reform bill at a time when insurance costs are increasing 10 to 20 percent annually,” said Mr. Parr.
Since March 2012, all preventative care is covered by all carriers and plans under the federal Affordable Care Act. Children are also covered up to age 26, and insurers cannot decline coverage for children with pre-existing conditions for individual coverage. Furthermore, lifetime maximums on health insurance plans have been eliminated.
A small-business tax credit covers eligible employers with 25 or fewer full-time equivalent (FTE) employees whose annual wages are less than $50,000. This tax credit equals 35 percent of an employee’s annual premiums the employer has paid for in years prior to 2014. It will increase to 50 percent after 2014.
Employers must provide employees with a summary of benefits and coverage (SBC), available from a broker or health insurance carrier. This document must include relevant data, including out-of-pocket costs, deductibles, limitations, referrals, etc., with definitions and examples, along with a standard form to help participants understand and compare plan options, according to Mr. Parr.
The penalty for not providing the summary is $100 per day for each affected employee.
Covered California is the name of the online health insurance exchange (coveredca.com) where small business employers with two to 50 workers can purchase group health insurance. Individual health plans are also available, along with access to a Federal Subsidy Assistance calculator.”
The exchange is scheduled to go live on Oct. 1 for health insurance plans with a Jan. 1, 2014, or later effective date. The exchange website already is live and has background information.
Employers are also required to provide employees with a notice of insurance exchange (NIE). The deadline for issuing these notices was originally set for this March, but has been delayed by state and federal courts. A new date has not been established.
An employer mandate to provide health care insurance applies to large businesses with 50 or more full-time-equivalent (FTE) employees, each working 30 or more hours per week, or 130 hours per month.
This mandate does not include designated seasonal employees working less than 120 days during the year. Leased employees also are not included. If a business is a large employer, seasonal employees working in excess of 30 hours a week are eligible for the penalty calculation.
The employer mandate comes with a series of penalties for non-compliance, such as when coverage is not offered and one employee obtains a subsidy in the exchange, triggering a state or federal audit and fines.
Will large employers keep their health care plans? Research suggests that most will, according to the experts at the roundtable.
“Top reasons for keeping their plans include retaining current employees, the ability to attract future talent and also in order to maintain employee satisfaction and loyalty,” Mr. Parr said. “This doesn’t mean that employers won’t compare the cost of offering health insurance to costs associated with paying penalties.”
Big changes to tax law in 2013
An overview of tax law changes was provided by Michael Ricioli, CPA, tax partner with Moss Adams LLP.
“As taxpayers prepared for the fiscal cliff at the close of the 2012 tax year, emphasis was placed on accelerating income, rather than escalating deductions, in an effort to take advantage of lower tax rates in 2012,” Mr. Ricioli said.
The federal top income tax rate increased from 35 percent in 2012 for ordinary income to 43.4 percent in 2013, including a new 3.8 percent surtax on net investment income.
Rates on long-term capital gains and qualified dividends rose from 15 percent in 2012 to 23.8 percent this year, also including the 3.8 percent surtax.
The new 3.8 percent net investment income surtax for Medicare is payable by individuals, trusts and estates on the lesser of net investment income, or excess modified adjusted gross income, over $200,000 for singles, $250,000 for married couples filing jointly and $11,950 for trusts and estates.
A 0.9 percent increase in the employee portion of Medicare Hospital Insurance (HI) FICA tax on wages is in effect for wages exceeding $200,000 for singles or $250,000 for jointly filing married couples in a calendar year. There was no change to the employer portion.
‘Sweet spot’ for S-corp.
Taxpayers can be hit with both Medicare and hospital insurance tax increases, and there will be more focus on lesser-involved owners to document their active participation in the business, according to Mr. Ricioli.
“A sweet spot exists for active S-corporation business owners who are paid reasonable wages,” he said. “These owners may be able to avoid both the 3.8 percent Medicare and the 0.9 percent HI taxes.”
Winery owners who do not have this structure, will likely start taking a closer look at S-corporations to minimize their tax liabilities, he said.
A business must have taxable income to take advantage of the accelerated-depreciation provisions under Internal Revenue Code Section 179. Amounts expensed under this section are excluded from uniform capitalization, or UNICAP. Therefore, these deductions are not required to be capitalized into bulk or cased goods inventory.
The expense limitation for the 2013 tax year is $500,000 and this benefit begins to phase out once eligible asset additions exceed $2,000,000.
The 50 percent bonus depreciation provision has been extended through 2013 and applies to new assets only. It includes qualified leasehold improvements (excluding related party leases) and will not cause an AMT adjustment, but it is subject to UNICAP.
In California, net operating losses are now available for use in the 2012 tax year. A single sales factor for apportionment calculations will be mandatory in 2013 under Proposition 39.
The state’s top individual income tax rate is now 13.3 percent under Proposition 30, and a sales-tax increase of 0.25 percentage points is also in effect due to Prop. 30.
A key item that applies to vineyard and winery owners is an analysis of the purchase-price allocation as it relates to the purchase and sale of a vineyard or winery.
“Various exemptions and provisions are sometimes overlooked pertaining to a sale, and it is important to understand what are the related tax implications of assigning different values to the assets being purchased to both the buyer and the seller,” he said.
Tools for growers, exporters
With the increase in tax rates in 2013, vineyard owners have an opportunity to take advantage of farm income averaging. This is another commonly overlooked provision that can provide vineyard owners with some significant tax benefits in upcoming tax years.
As wineries continue to increase global sales, tax planning has increased around international transactions. Although tax rates have gone up, wineries with international sales are still taking advantage of the use of an Interest Charge-Domestic International Sales Corporation (IC-DISC).
If structured correctly, this allows a winery to have a portion of its income that would otherwise have been taxed at their ordinary tax rate, converted to a qualified dividend that is taxed at the current maximum rate of 23.8 percent. This tax rate arbitrage can provide significant tax savings for wineries, given the right circumstances.
Cost-shifting eases tax impact
Despite all the estate planning done in 2012, such a review for this year will continue to be relevant due to relatively low valuations, higher exemptions, the possible elimination of valuation discounts, and limitations of leveraging techniques — like grantor trusts such as grantor retained annuity trusts (GRATs), according to Jay Silverstein, J.D., LLM, a Moss Adams principal.
“In 2012, planning was based on the assumption that the $5.12 million exemption would be reduced, when, in fact, it was increased,” he said. “Because of the higher exemptions, more emphasis will be placed on making ownership transitions that preserve and protect business assets and shift income to adult children who are in lower tax brackets.”
Estate, gift and generation-skipping tax (GST) rates all went up to 40 percent this year from 35 percent last year. However, the exemption for all categories increased from $5.12 million to $5.24 million per person, or to $10.48 million for a married couple.
Owners of large wineries, those with a net worth in excess of $10 million, can take advantage of valuation discounts and GRAT benefits and grantor trusts to transfer significant wealth free of estate and gift tax, according to Mr. Silverstein.
“With increased income tax rates and estate and gift exemptions, winery owners will have to weigh estate and income tax benefits of current gifting with the loss of basis step up on assets held until death,” he said.
“Higher income tax rates and the new 3.8 percent Medicare tax, have made shifting income more important,” Mr. Silverstein said. “However, we should let the tax tail wag the dog by gifting assets to the next generation to minimize estate and income taxes, but not create an ownership structure that fails to preserve the value of the winery because of family conflicts.”
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