John Vandenhoff continues his exploration of  the tax implications of the new health care law. There’s also more in a series of informational podcasts on the Web site of the Law Firm Alliance, of which we are a member.

In our previous posts, we briefly talked about the new Healthcare legislation which was signed into law (H.R. 4872 the Healthcare and Education Reconciliation Act of 2010 (Reconciliation Act, P.L. 101-152)) (the “Healthcare Act”) and described a number of the major individual mandates contained within that Act.

We continue to present a brief overview of some of the key tax changes affecting individuals and businesses in the Healthcare Act. Please call our offices for details of how the new changes may affect your specific situation.

New for Employer-Provided Plans

The Healthcare Act requires certain changes so that in any employer-provided health insurance plan, the child of any covered employee may be included in coverage until such child reaches age 27, even if the child cannot be claimed as a dependent of the employee on the employee’s federal tax return. The same change is also effective for health insurance plans of self employed individuals (effective March 30, 2010, a self-employed individual may take a “for adjusted gross income” deduction of health insurance premiums where the insurance covers the self-employed individual, the individual’s spouse, the individual’s dependants, and the individual’s children who have not attained age 27).

The Healthcare Act further requires that group health plans that cover dependant children must continue to make dependant coverage available for an adult child until the child reaches age 26. Although there is no requirement for a plan or issuer to provide health insurance coverage for anyone, including dependants, if coverage is provided for dependant children then, under the Healthcare Act, the coverage must continue until the child turns 26. (Note that it is unclear why this provision applies to children under age 26 and other provisions described above apply to children under age 27.)

Health Savings Plans Affected

The Healthcare Act makes several significant changes to certain health savings plans, including health savings accounts (“HSA”), health flexible spending arrangements (“FSA”), health reimbursement arrangements (“HRA”), Archer or medical savings account (“MSA”) and other qualified employer health plans. Current law generally allows participants of these plans to set aside funds, pretax, which will be used to reimburse them for certain healthcare expenses. Presently, reimbursement for over-the-counter medicines and drugs have been very liberal (even over-the-counter aspirins and cough medicine would qualify). The Healthcare Act provides that for amounts paid in tax years beginning December 3, 2010, the allowable medicines for reimbursement will be more restricted. Unless a prescription from a doctor is acquired for over-the-counter medicines, only payments for prescribed drugs and insulin will be eligible for reimbursement.

Another significant change regarding health FSAs is that the amount a participant may set aside per year will be restricted. Currently, there is no statutory restriction as to how much an participant may set aside in a health FSA and such amount is usually limited only by the employer. Effective for tax years beginning after 2012, an employee may only set aside $2,500.00 per year in an FSA. For taxpayers who have been setting aside amounts greater than $2,500.00, this will effectively result in a lost deduction and an increase in tax (regardless as to the taxpayer’s current taxable income).

Due to the Healthcare Act there also will be additional reporting required of most businesses. For all payments made after 2011 by any person engaged in a trade or business (a “Payor”) an information return must be filed for all payments made totaling $600.00 or more in a calendar year to a single payee (other than a payee that is tax exempt). Also, payments to corporations, except those made for medical or healthcare services, are not required to be reported on an information return.

Paying for the Healthcare Act

In another effort to raise money to assist in paying for the expense of increasing federal payments under Healthcare Act, individuals will find it harder to deduct medical expenses. Under current law, a taxpayer may only deduct medical expenses to the extent all such expenses incurred during a single year exceed 7.5% of the taxpayer’s adjusted gross income. Starting in 2013, the Healthcare Act generally increases the threshold for claiming an itemized deduction for unreimbursed medical expenses from 7.5% of adjusted gross income to 10% of adjusted gross income.

Beginning in tax years after 2013, a penalty will be assessed against most individuals who did not have minimum essential health coverage for a month. The penalty will be paid with an individual’s income tax return and be based upon a percentage of household income in excess of a threshold amount. The penalty will be lower in 2014 and gradually increase until 2016, when the penalty will generally be 1/12 of the greater of (i) $695.00 per uninsured adult; or (ii) 2.5% of the household income in excess of the threshold amount of income required for filing a return.

Our Virginia and North Carolina tax lawyers are helping clients wrestle with these and other changes that proceed from the Healthcare Act. If you have questions or comments, please post them below and we will try to respond.

Local gourmet food truck Only Burger is aspiring to be a contestant on the Great Food Truck Race, a reality show on Food Network.  Vote Here.

I’ve been thinking about communication lately.  Many people don’t like to talk on the phone anymore.  As more and more people get smart phones, the number of voice minutes used has stayed the same, while the data usage is skyrocketing. 

I have long preferred email, where possible, to voice calls, and hardly speak on the phone at all outside the office.  Now, email is old-hat in many circles, and I text not only my friends, but colleagues, parents and day care providers. 

I was at a meeting of the Durham Small Business Advisory Committee yesterday, and we were discussing how best to let people know about our programs.  There are so many ways to reach people, newspaper, radio, email blasts, list-servs, tweets, Facebook, etc. 

How do you like to be contacted?

John Vandenhoff continues his exploration of  the tax implications of the new health care law. There’s also more in a series of informational podcasts on the Web site of the Law Firm Alliance, of which we are a member.

In our previous posts (here and here), we talked about the new healthcare legislation which was signed into law (H.R. 4872, the Healthcare and Education Reconciliation Act of 2010 (Reconciliation Act P.L. 101-152)) (the “Healthcare Act”) and described a couple of the major mandates contained within that Act.

In these, we present a brief overview of some of the key tax changes affecting individuals and businesses. Please call our Virginia and North Carolina business lawyers for details of how the new changes may affect your specific situation.

Amongst other provisions, the Healthcare Act codified the common law Economic Substance Doctrine which had been developed by the Internal Revenue Service (“IRS”) and the courts. Essentially, the courts have denied claimed tax benefits if the transaction that gave rise to those benefits lacked economic substance independent of tax considerations, even though the purported activity actually occurred. In other words, the IRS was empowered to set aside a transaction that, although technically in compliance with all tax statutes and regulations, lacked true economic substance and was entered into almost entirely for the purported tax benefit.

New in IRS Code

The Healthcare Act enacted new Section 7701(o) of the Internal Revenue Code, which provides that a transaction will be treated as having economic substance only if the transaction changed in a meaningful way (apart from federal income tax effects) the taxpayer’s economic position; and, the taxpayer has a substantial purpose (apart from federal income tax effects) for entering into such transaction. The transaction must satisfy both tests in order for it to be deemed as having economic substance.

There has been speculation as to the extent the new codified doctrine will be applied. The statute states that the determination of whether the Economic Substance Doctrine is relevant shall be made as if the statute were never enacted. See Section 7701(o)(5)(C) of the Internal Revenue Code. The Joint Committee Report further states that “if the realization of the tax benefits of a transaction is consistent with the Congressional purpose or plan that the tax benefits were designed by Congress to effectuate, it is not intended that such tax benefits be disallowed.” However, it still remains that both prongs of the two-part test must be met in order for the transaction to be deemed to have economic substance.

Codification Imposes Penalties

The teeth for the codification of the Economic Substance Doctrine is that a new penalty applies for an underpayment attributable to a transaction lacking economic substance. The penalty rate is 20% of the amount of the underpayment, but is increased to 40% if the taxpayer does not adequately disclose the transaction on the taxpayer’s return or on a statement attached to the return. It is also important to note that the reasonable cause and good faith exception (which have generally been held to be exceptions to paying penalties for underpayment of tax) do not apply to any portion of an underpayment which is attributable to a transaction lacking economic substance.

The codification of the Economic Substance Doctrine (and the penalties on resulting underpayments) are effective for all transactions entered into after March 30, 2010.

Please see future posts for information regarding other tax affects of the Healthcare Act which take effect in years beginning after 2010. As business and tax attorneys, we invite you comments below about the new healthcare law and its effects on your and your business.

Do women business-owners really have less access to capital than men?

I was reading this article exploring the reasons why women business owners have less access to venture capital than male business owners do.  The data shouldn’t have surprised me, but they did.

I have been a woman in male-dominated areas since 1985 when I was a female sports reporter (and later the sports editor) for The Daily Northwestern student-run newspaper. 

I remember feeling like the only woman at a Big Ten Conference basketball press conference who wasn’t a wife or secretary.  When I asked a question, everyone turned around in surprise at the sound of my voice.  I remember a local news crew filming me in the football locker room post-game press conference, as if I were the news for just being in there.

I am now a business attorney — one of only two women attorneys in the 24 business attorneys at Sands Anderson.   Most of the attorneys I negotiate transactions against are men.  Many, although not all, of my clients are men.  I work with male accountants, financial advisors and bankers.  I don’t think about gender at all.  

I forgot how hard women struggled to vote, to own property in their own names, have professional opportunities and to be taken seriously in the business world. Then an article like this comes along to remind me that there are still struggles in day-to-day business life. 

As a woman business owner in North Carolina, what experiences have you had being taken seriously, having access to credit and competing in business?

When we bought our house, a partially renovated REO property, I worked closely with our insurance agent to create an insurance policy based on the actual features of the house.   I didn’t choose the cheapest home-owners policy, but the one that would allow us to rebuild what we had in the event of a worst-case scenario.  

In these tough economic times, many people are making purchasing decisions based on price alone. Sometimes, price is not the most relevant factor.  Saving a few cents on the front end may be quite foolish down the road. 

A web designer I know is now paying a little more for his accountant that he had in the past, but the accountant is available to answer questions and makes producing a P&L statement very easy.  It was worth the extra $300/year to have access to information and to avoid aggravation. 

In what situations do you think price is not the most important purchasing criteria?  What other factors are important?

Electrons are buzzing today about the CISCO 2010 Midyear Security Report, which states that seven percent of the people who access Facebook at work spend more than an hour a day playing FarmVille, Mafia Wars and similar games. 

Social media policies have their place to protect the legitimate interests of businesses, but I have to agree wholeheartedly with David B. Thomas of SAS, who sees this as a performance management problem rather than a social media policy problem:

This is not trivial. This is not insignificant. Social media can be a productivity drain. But so can the Web. So can the phone. So can talking to co-workers. So can… air. Chairs. Doors. I once saw a co-worker at a previous job sit in her chair, handbag on her lap, and stare into space from 4:45 until 5:00, then get up and go home.

If people don’t want to work, are bored with their jobs, don’t understand their contribution to the organization, how it affects the bottom line and why it’s in their best interest to do their jobs well, they will zone out. The way they choose to zone out is not the issue.

If your employees are averaging 68 minutes a day on FarmVille, you don’t have a social media problem. You have a performance management problem.

What do you think?

If you lend money to a friend, expect to lose the friend and the money. And in North Carolina, if you help a friend buy a house, you could also be committing a class 3 misdemeanor.

Until recently, the North Carolina Mortgage Licensing Act made it a criminal act for a non-licensed individual to loan money to someone else for the purchase of a property to be used for “personal, family or household use.” In English, much to the dismay of the real property bar, this means, it was illegal for parents to lend money to their children for the purpose of buying a home.

This law was modified about this time last year, and now specifically allows an individual to provide a residential mortgage loan to an immediate family member. “Immediate family member” means a spouse, child, sibling, parent, grandparent, or grandchild, or the spouse of an immediate family member. This term includes stepparents, stepchildren, stepsiblings, and adoptive relationships.

It is still illegal for an aunt and uncle to loan money to a niece or nephew, or a good family friend to loan you money to buy a house. A lot of real estate attorneys think an individual should be permitted to make a few loans to friends or family over the course of his lifetime, without having to register as a mortage lender, broker or originator. 

I was also reminded recently that there could be tax consequences to loaning money at below-market interest rates (or at no interest). If you don’t charge interest, the interest you didn’t collect could be considered income, according to the IRS. They could also be considered gifts. 

Finally, it is especially important to document the terms of a loan with a friend or family member, even if you just assume you’ll never see the money again. If the money is going to starting up a business, the business owner may not be able to get a bank loan or other financing down the road if he can’t show where his start-up capital came from. You may also think you own a piece of the business (equity) while the owner thinks you gave a loan (debt).

When in doubt, please consult a business attorney about the consequences of loaning money to friends and family.

In a previous post, John Vandenhoff briefly talked about the new Healthcare legislation which was signed into law (H.R. 4872 the Healthcare and Education Reconciliation Act of 2010 (Reconciliation Act, P.L. 101-152)) (the “Healthcare Act”) and described a couple of the major individual mandates contained within that Act.

In this and future posts, we continue to present a brief overview of some of the key tax changes affecting individuals and businesses in the Healthcare Act. Please call our Virginia business lawyers and North Carolina corporate attorneys in our Richmond office and Research Triangle office for details of how the new changes may affect your specific situation.

Income Tax Credit for Eligible Small Employers.
The Healthcare Act provides for an income tax credit for “Eligible Small Business Employers” (defined below) that: i) offer health insurance to employees; ii) pay at least fifty percent (50%) of the cost of the insurance, and iii) contribute a uniform percentage (at least fifty percent (50%)) of the premium cost of each employee who enrolls in the employer’s employee health plan. The maximum credit of thirty-five percent (35%) is available for tax years beginning after 2009. The maximum credit increases to fifty percent (50%) for tax years beginning after 2013. The credit is only available to an employer that purchases health insurance coverage for its employees through a state exchange , and is only available for a maximum coverage of two (2) consecutive tax years.

The credit is only available to employers that meet the definition of “Eligible Small Employers”, andother specified criteria. Only premiums paid by the Eligible Small Employer under an arrangement meeting certain requirements are counted in calculating the credit.

An “Eligible Small Employer” is generally defined as a employer with no more than twenty-five full-time equivalent employees, and whose employees have annual full-time equivalent wages that average no more than Fifty Thousand and 00/100 Dollars ($50,000.00). However, because of certain phase-out rules, the full amount of the credit is available only to an Eligible Small Employer with ten (10) or fewer full-time equivalent employees and whose employees have average annual full-time equivalent wages from the employer of less than Twenty-Five Thousand and 00/100 Dollars ($25,000.00).

To determine whether an employer is eligible for the credit, and the amount of the credit, the employer must first calculate how many full-time equivalent employees the employer employs and the average annual full-time equivalent wages. The number of full-time equivalent employees is determined by dividing the total employee hours worked for the year (counting all full-time and part-time employees) by 2,080. The result of this computation is rounded to the lowest whole number. Average annual full-time employee wages are determined by dividing the employer’s aggregate wages for the year by the number of full-time employees (rounded down to the nearest 1,000).

Therefore, during the years in which the credit is available, small employers have incentive not to hire as many employees nor pay them wages which would increase their average full-time equivalent wages above Fifty Thousand and 00/100 Dollars ($50,000.00).

The credit is not allowed for health insurance premiums paid for partners, sole proprietors, more than two percent (2%) shareholders of an S corporation, more than five percent (5%) owners of a regular C corporation, or “non-qualifying family members” of the foregoing owners. Further, seasonal workers (individuals who work for less than one hundred twenty (120) days for the employer) are not included in the computation for full-time equivalent employees or full-time equivalent wages.

Adoption Credit.
For tax years beginning after 2009 and before 2012, the Healthcare Act increases the adoption tax credit from Twelve Thousand One Hundred Seventy and 00/100 ($12,170.00) to Thirteen Thousand One Hundred Seventy ($13,170.00), and the credit is refundable for those years.

Expanding Health Coverage to Adult Children Under 27 Years of Age.
Effective March 30, 2010, the Healthcare Act requires that group health plans provide coverage to an enrollee’s dependents up to age twenty six (26). The requirement applies regardless of factors such as a young adult’s marital status, student status, financial dependence on the primary enrollee, eligibility for other coverage or any combination of those factors.

Excise Tax on In-Door Tanning Services.
The Health Care Act imposes a new ten percent (10%) excise tax on customers of in-door tanning salons , for services performed after June 30, 2010. The tax is imposed on the full amount of the charge for the service and is imposed regardless of who pays the ultimate cost for this service. It is curious (or maybe entertaining) to note that originally the excise tax was proposed to be applied to services for plastic surgery. However, the imposition of this excise tax was changed to tanning services by the enactment of the final bill.

Please see future posts for information regarding the codification of the economic substance doctrine and for other tax affects of the Health Care Act which take effect in years beginning after 2010.

These changes are substantial and affecting individuals and businesses profoundly. We already know of one business that will be gone due to the new bill. Are you seeing any negative impacts of the reform yet?

As far as I can tell, it is human nature to gripe.

But there can be consequences to public griping, and not just griping via social media. The latest social media tempest is CNN Mideast Editor Octavia Nasr, who tweeted that Grand Ayatollah Mohammed Hussein Fadlallah was “one of Hezbollah’s giants I respect a lot.” She was fired for compromising her objectivity.

A waitress in Charlotte was fired after venting on Facebook about customers who lingered for hours and then gave a paltry trip. She named the restaurant in her post.

But General Stanley A. McChrystal was also fired. He gave an interview to Rolling Stone, a print magazine founded in 1967, in which he criticized his commander-in-chief and the administration’s Afghanistan policy.

I have written previously about ill-considered tweets and status updates. It is easy to get in trouble online.  But as the General McChrystal affair shows, any public comment about your employer can get you in hot water.

The lesson from all of this is that the only freedom of speech granted in the US Constitution is the freedom from the government censoring your political speech. Commercial speech has less protection than political speech, and employers in North Carolina and other at-will employment states have broad rights to fire you for giving your opinion.

They also have the right to sue you for defamation if your comments aren’t true.

This issue gets people hot under the collar. As employment attorneys, we would advise our clients to have current social media policies and follow them to the letter in every case.