DGC Enewsletter 5-10

How to Claim Casualty Losses Related to Recent Flooding
By Leanne Stafford, CPA

On March 29, 2010, the President declared the counties of Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk and Worcester as federal disaster areas qualifying for individual assistance. Rhode Island was also declared a federal disaster area. As a result, the IRS extended the April 15th tax return filing deadline until May 11th for the taxpayers who reside or have a business in the disaster areas. Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either 2009 or 2010.

This provides the taxpayer the option to receive an earlier refund by claiming the loss on their 2009 original return or an amended return or wait to claim the loss on their 2010 tax return. Careful planning should be done to maximize the tax savings depending on the taxpayer’s individual circumstances.

Casualty losses are generally deductible in the year the casualty occurred. You can claim a casualty loss from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption. If your personal property is not completely destroyed from the event, the amount of your casualty loss is the lesser of the adjusted basis of your property or the decrease in fair market value of your property as a result of the casualty. The adjusted basis of your property is usually your cost, increased or decreased by improvements or depreciation. You may determine the decrease in fair market value by appraisal or in some cases the cost of repairing the property.

If the property is personal-use property, your loss is treated as an itemized deduction and it must be reduced by three items:

By $100. This $100 reduction applies to each casualty event that occurred during the year, plus
10% of your adjusted gross income plus,
Any insurance or other reimbursements you receive or expect to receive.

If an insurance reimbursement is expected but you have not received it when your tax return is filed, you factor in the expected reimbursement in determining the amount of your loss. If the reimbursement turns out to be less than what you expected, a loss can be claimed in the year it is determined that you will not receive anything else.

If your loss deduction is more than your income, you may have a net operating loss. You can carryback the loss two years or carry it forward for 20 years.

If business-use property was damaged or destroyed from any sudden, unexpected, or unusual event, you can realize a business casualty loss. The amount of the loss is the lesser of the adjusted basis of the property or the decrease in the fair market value due to the casualty. (The $100 reduction and 10% of your adjusted gross income do not apply.) You still have to reduce the loss by any insurance proceeds you have received or expect to receive. If the business property is totally destroyed and the fair market value of the property is less than its adjusted basis immediately before the casualty, the loss is calculated solely by considering the adjusted basis and the insurance proceeds. The decrease in fair market value is not considered.

If you are a taxpayer with casualty losses resulting from the recent disaster, feel free to contact your DGC representative with questions. We can also assist with planning to maximize your tax savings.

Researchers: Discover Benefits of New Biotech Tax Credit
By Erica Nadeau, CPA

The Patient Protection and Affordability Act that was recently signed into law includes a tax credit for qualified investments made for the advancement of healthcare. The credit, known as the qualifying therapeutic discovery project (QTDP) credit equals 50% of the qualified investment made by an eligible taxpayer during any tax year beginning in 2009 or 2010 on qualifying projects.

For businesses that are not yet profitable, the Act provides for a grant in lieu of the credit. This results in real dollars flowing into the company versus a credit that might not be utilized until a future year. For example if a business has $1 million in qualified investments, they may reduce their tax liability by $500,000 by taking the tax credit. If the business does not have a tax liability, they may opt to receive a check from the US Treasury for $500,000.

Criteria which apply to the credit include:

Limit $5 million per business and $1 billion overall;
Available only to businesses with fewer than 250 employees;
Qualified investment is equal to the costs paid or incurred during the tax year for necessary and direct expenses related to the qualified project.

The project must be designed:

to treat or prevent diseases or conditions by conducting pre-clinical activities, clinical trials and clinical studies or carrying out research protocols;
to diagnose diseases or conditions or to determine molecular factors related to diseases or conditions;
or to develop a product, process or technology to further the delivery or administration of therapeutics.

When evaluating the application, the IRS will consider the reasonable potential of the project to result in new therapies, reduce long-term health care costs, or significantly advance the goal of curing cancer in the next 30 years. They will also take into consideration the project’s potential to create and sustain U.S. jobs and to advance the U.S. in the fields of life, biological and medical sciences. The IRS will consult with the Secretary of Health and Human Services on the above determinations.

The application process opens on June 21 and ends on July 21, 2010. The IRS will notify applicants of their determination by October 29, 2010. Please note that the application has not been finalized by the IRS, however the guidelines have been published so business do not need to wait until June 21 to start collecting and organizing their information.

If you have questions or need assistance applying for the credit, contact a DGC team member.

Planning for 3.8% Medicare Tax on Investment Income
By Sarah Wulf, CPA

Beginning in tax year 2013, certain higher income taxpayers will be subject to a 3.8% Medicare tax on their net investment income. Since the new law will not kick in for a couple of years, we expect that Congress will fine-tune and clarify many of the details. However, the gist and overall intention of the law are not likely to change significantly.

Net investment income for purposes of this surtax includes interest, dividends, royalties, rents, passive activity income and net gain from the disposition of property (other than property held in a trade or business). Investment income is reduced by properly allocable deductions to arrive at net investment income.

The new tax will be assessed in addition to the income taxes related to the same income. Because this additional tax may have a significant impact on many taxpayers, it is important to begin planning now to help mitigate the effect of the tax.

Married taxpayers filing jointly with modified adjusted gross income (MAGI) in excess of $250k and single taxpayers with MAGI in excess of $200k will be affected. Therefore, to the extent that MAGI can be controlled, taxpayers may be able to minimize the impact of the 3.8% Medicare tax. This can be achieved by controlling the timing of income and/or by considering the character of each income stream.

There are certain “big ticket” items that may be viable planning opportunities for our clients:
Portfolio allocation, in particular the allocation between taxable and tax-exempt investments, can have an effect on both MAGI and net investment income.

The sale of a primary residence that is expected to generate a gain in excess of the statutory $500k gain exclusion ($250k for unmarried taxpayers) will impact both MAGI and net investment income as will the gain on the sale of a vacation home. To the extent the timing of such events can be controlled, the taxpayer may be able to minimize his exposure to the Medicare tax on this income.

The distinction between a traditional IRA and a Roth IRA is significant, since only distributions from traditional IRAs are included in MAGI. Traditional IRA distributions are included for the purposes of determining if a taxpayer will be subject to the Medicare tax, but are not themselves subject to the tax.

The timing for completing a Roth conversion will impact a taxpayer’s MAGI, though the conversion income will not itself be subject to the Medicare tax.

Taxpayers turning 70 ½ in tax year 2012 may have a planning opportunity to time their first Required Minimum Distribution (MRD) before the Medicare tax kicks in. As with other retirement plan distributions, the distribution itself will not be subject to the Medicare tax, but it will increase MAGI.

As always, tax planning should not drive the decision-making process. For any of these potential opportunities, it is important that other considerations, such as investment strategy or expectations re: future events, be the primary rationale for any changes that the taxpayer implements.

Please contact your DGC client relationship representative if you have any questions.

May 27 - Boston Estate Planning Council (BEPC) – Estate Planner of the Year Dinner
June 3 - DiCicco, Gulman & Company – A&E Northeast Management Summit
June 10 - Association for Corporate Growth (ACG) – Growth Conference 2010
June 10 - Cambridge Chamber - Excellence in Business Awards
June 10 - Boston Chamber - Government Affairs Forum - Charlie Baker
June 14 - Massachusetts Nonprofit Network – Nonprofit Awareness Day luncheon