Virginia has topped the charts as the number one state in the nation for doing business according to CNBC.  When it awarded Virginia first place this year, CNBC remarked:  “we are starting to detect a pattern here.”  This is the second time that Virginia has run away with the award for top state for business since 2007 when CNBC started the awards.  Virginia has been either #1 or #2 every year since the awards began. 

 See the full survey results at  http://www.cnbc.com/id/41666602/

 This year, Virginia seized the top spot once again with the best overall score in the history of the CNBC study — 1,660 out of 2,500 points.  CNBC‘s Senior Correspondent, Scott Cohn quipped:  “we couldn’t have planned it this way, and if we could have, we might have mixed things up a bit.”   The annual study, measures all 50 states on 43 different metrics in ten key categories of overall business competitiveness.   They weight the categories based on how frequently the states themselves use them as selling points to attract business.   This method holds the states accountable to their own standards of performance and provides insight into the credibility of their sales pitch.

 The ten categories for selection criteria and weightings are:

 1.  Cost of Doing Business (350 points)

 2.  Workforce (350 points)

3.  Quality of Life (350 points)

 4.  Infrastructure & Transportation (325 points)

 5.  Economy (300 points)

 6.  Education (225 points)

 7.  Technology & Innovation (225 points)

 8.  Business Friendliness (200 points)

 9.  Access to Capital (100 points)

 10.  Cost of Living (50 points)

 According to CNBC Virginia is a perennial favorite because of its strategic location, friendly business climate and diverse economy. It moved back to the top this year thanks to marked improvements in a couple of key areas. 

Virginia’s tax burden improved considerably, helping the state move up five places to number 21 in the all-important “Cost of Doing Business Category.”  In the “Education Category,” a critically important factor for businesses looking for an educated and motivated workforce, Virginia jumped seven points to number 6, reflecting the Commonwealth’s efforts initiated in 2009 to reduce class sizes.

Virginia did what it does best each year in the study:  it shows a solid all-around performance by finishing in the top 10 in a number of key categories.  In 2011 it finished in the top 10 in five categories (“Infrastructure & Transportation” at number 10, “Economy” at number 8, 6th place in “Education,” 2nd in “Business Friendliness” and 10th in “Access to Capital”).

 Foreign and domestic enterprises should take note.  Virginia deserves to be on your short list for headquarters and operations in your future development plans.

Related articles

• Virginia Is For Lovers Of Free Enterprise Business (virginiavirtucon.wordpress.com)

The Act’s title of “small business” is somewhat of a misnomer. Its provisions have a significant impact on businesses of all sizes, not simply small ones. In addition, the new law includes some retirement savings incentives for individuals and other provisions unrelated to small businesses jobs creation.

Over the next few weeks we will be featuring a series of articles on this important law and discussing the elements of the SBJA that all businesses should be aware of.

Bonus Depreciation

The Bonus Depreciation needs to be our first topic because it is an expense deduction that can be taken immediately for certain qualifying property but, in order to be eligible for 2010 tax benefit, the equipment must be placed in service now before year’s end.

The SBJA extends the 50-percent additional first-year bonus depreciation for the 2010 tax year. Under this law, all businesses, regardless of size, can immediately depreciate an additional 50-percent of the cost of specified property purchased and placed in service in 2010. This is in addition to the IRS Code Sec.179 expensing (allowing expense deductions for capital investments), which was also extended by the SBJA through 2011. The effect of this is to enhance significantly the deductions for capital purchases and thus reducing corporate taxes.

Bonus depreciation is allowed only for: (1) tangible property to which Modified Accelerated Cost Recovery System (“MACRS”) applies that has a recovery period of 20 years or less, water utility property, certain computer software, and qualified leasehold improvement property. Except for certain computer software, the depreciation is not usable for other intangible property.

The bonus depreciation deduction is calculated by multiply the unadjusted depreciable basis of the property by 50-percent. This is the amount of depreciation the business can deduct in the first year in addition to the regular depreciation. If your business purchases a machine in 2010, for example, for $50,000 and it qualifies for the bonus deduction, your business would be allowed to deduct $25,000 in first-year depreciation. In addition, the remaining cost of the machine is available for the normal deduction under MACRS. This is a significant acceleration of the cost recovery business expense.

In order to take the deduction for the 2010 tax year, however, your business must put the equipment into service in 2010. We don’t advise doing deals based on tax impact alone, but if your business was otherwise in the market for that qualifying capital equipment, now is the time to buy.

Stay with us for this series on the new Small Business Jobs Act. We will keep you informed of other important provisions of the SBJA. This law, if understood and used, will have a significant impact on your businesses after-tax cash flow. If you have any questions please contact us here at Sands Anderson.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication was not intended or rendered, and cannot be used to: (i) avoid penalties under the Internal Revenue Code; and/or (ii) promote, market or recommend to anyone else anything the communication addresses.
This article is distributed with the understanding that Sands Anderson is not providing legal, or other professional advice. Facts and circumstances differ among taxpayers and you should contact our firm to discuss the specifics of your situation and how they may apply to information presented here.

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.

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 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 Virginia business lawyers and North Carolina tax attorneys, we invite you comments below about the new healthcare law and its effects on your and your business.

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?

The patent application in this case sought protection for a claimed business process that explains how commodities buyers and sellers in the energy market can hedge against the risk of price fluctuations . The key claims involved in the patent application described a series of steps on how to hedge the risk and included a simple mathematical formula. One of the reasons this case was closely watched was that protection of business processes, in particular those using the Internet, have become common and important to developers of business models that are based on a proprietary methodology. If a method can be copied with no legal barrier for protection then the value of the business model collapses.

Generally, the federal statutes specify four independent categories of inventions or discoveries that are eligible for patent protection: (1) processes; (2) machines; (3) manufactures; and (4) compositions of matter. There have been recognized exceptions in court precedents of categories that are not patentable: “laws of nature, physical phenomenon, and abstract ideas.” Historically, the lower courts had held that in order for a process to be patentable: “ (1) it had to be tied to a particular machine or apparatus, or (2) it had to transform a particular article into a different state or thing.” This formulation became known as the “machine-or-transformation test” for approving a process patent. Certain appellate courts had concluded that the machine-or-transformation test was the exclusive test to pass in order to be granted a process patent. The Supreme Court in Bilski held that this line of reasoning incorrectly concluded that the machine-or-transformation test was the sole test. This test is only one among several factors to consider but it is not the sole test for deciding whether a process is patent-eligible.

The Supreme Court held that the Patent Act permits business methods to be patentable processes. The court went on to indicate, however, that even if a particular business method fits into the statutory definition of a “process,” that does not mean that the patent application claiming the process should be approved. The business process patent application still needs to qualify under the other criteria of the statute. To receive patent protection a business method or process must be “novel,” “non-obvious” and “fully and particularly described,” and it can’t be one of the exceptions to patent protection: laws of nature, physical phenomenon, or abstract ideas. In this case the court held that the concept of hedging risk and the application of that concept to energy markets was an attempt to patent an abstract idea, and therefore was not patentable. In this form, the decision did not help practitioners much in dealing with process claims that fail the machine-or-transformation test and are not held to be abstract ideas, laws of nature, or physical phenomena. To a great extent the case has left the legal landscape in this area unchanged but more guidance needs to be provided if the courts want to help practitioners protect client’s with models built upon proprietary business processes.

John Vandenhoff

On Mar. 30, 2010, President Obama signed into law H.R. 4872, the Health Care and Education Reconciliation Act of 2010 (Reconciliation Act, P.L. 111-152 ), effectively completing a massive overhaul of the U.S. health care system that will affect nearly all taxpayers, many employers, and many elements of the health care industry. The Reconciliation Act modifies H.R. 3590, the Patient Protection and Affordable Care Act (Health Care Act, P.L. 111-148 ) where the bulk of the legislation became law on March 23, 2010.

In the next few posts, we present a brief overview of some of the key tax changes affecting individuals in the recently enacted health reform legislation. Please call our offices for details of how the new changes may affect your specific situation.

Individual Mandate

The new law contains an “individual mandate”-a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty after 2013. In Virginia, this is resulting in a court battle because the Virginia legislature passed a law in its recent session exempting citizens from this requirement. If enforceable under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in over three years starting in 2014.

Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S.

Premium Assistance Tax Credits for Purchasing Health Insurance

The health care legislation provides tax credits to low and middle income individuals and families for the purchase of health insurance. Specifically, for tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an Exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an Exchange. Under the provision, an eligible individual enrolls in a plan offered through an Exchange and reports his or her income to the Exchange. Based on the information provided to the Exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an Exchange, the premium payments are made through payroll deductions.

The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis.

The Court of Appeals for the Federal Circuit in the Bilski case overthrew a test called: the “useful, concrete and tangible result” test that it had articulated in the 1998 case of State Street Bank & Trust Co. v. Signature Financial group, Inc. The State Street case opened up a deluge of business method patent applications for any developer of a new method or process, especially internet designers and code developers. The Appeals Court in that case derived a test known as the “machine-or-transformation” test. This test requires that all patentable methods must either (1) be tied to a particular machine or apparatus, or (2) transform a particular article into a different state or thing. Bilski’s method patent failed both.

Bilski’s argument is that hedging risk in commodities trading shouldn’t be categorically excluded from patenting just because it doesn’t centrally involve equipment, such as wires and electricity like the telephone and the telegraph or because it does not transform one thing or material into another. Only literary works, abstract principles and mental processes can be excluded, the argument goes, and Bilski’s invention is none of these.

By agreeing to hear this appeal the Supreme Court is considering a question of great importance to entrepreneurs and inventors of all stripes. Critics of the business-method patents say that these patents were never intended to protect such things as abstract concepts or mathematical algorithms rather than concrete physical inventions. Supporters of the business method patents say they are essential to promoting innovation and entrepreneurship in today’s knowledge-based, internet-driven economy.

Whichever way the Supreme Court rules it’s likely that the holding will have a significant impact on innovation for years to come. A variety of businesses have written “friend-of-the-court briefs” (amicus curiae) on both sides of the issue. IBM, which over the years has obtained many business-method patents, filed an amicus brief stating that it is now opposed to them. IBM now maintains that the patents are unnecessary for the promotion of innovation. They believe that businesses would develop these new processes without patent protection. IBM’s in-house patent attorney, David Kappos stated that: “You’re creating a 20- year monopoly for no good reason.”

Bilski will definitely be a watershed case. The Supreme Court is due out with its opinion in a matter of weeks.

John Vandenhoff

In the last post, we cited the two main provisions of the recently signed “Hiring Incentives to Restore Employment Act of 2010” (the HIRE Act, P.L. 111-147 ). Some additional features of the new payroll tax hiring incentive include:

• The tax benefit of the new incentive is immediate. It puts money into a business’ cash flow immediately, since the tax is simply not collected in the first place.

• The tax benefit generally applies only to private-sector employment, including nonprofit organizations—public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution qualifies.

• There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.

• For workers that would otherwise be eligible for the Work Opportunity Tax Credit (i.e., another type of employment tax credit), the employer must select one benefit or the other for 2010. There is no double dipping.

• An employer can’t claim the new tax breaks for hiring family members.

• A worker who replaces another employee who performed the same job for the employer isn’t eligible for the benefit, unless the prior employee left the job voluntarily or for cause.

• For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn’t been employed for more than 40 hours during the 60-day period ending on the date the employment begins.

• The incentive isn’t biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.

• The payroll tax holiday doesn’t apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the fist calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.

• The Act creates a similar new set of rules allowing a payroll tax holiday for railroad retirement tax purposes.

The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker’s wages during the 52-consecutive-week period exceed $16,129.03. However, the credit isn’t available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers).

John Vandenhoff

About two months ago, President Obama signed into law the “Hiring Incentives to Restore Employment Act of 2010” (the HIRE Act, P.L. 111-147 ). The main thrust of this Act is a payroll tax holiday and up-to-$1,000 tax credit for businesses that hire unemployed workers. The Act also includes a one-year extension of the enhanced small business expensing option under Code Sec. 179 . Let’s look at some of the important details.

1. Payroll tax holiday and up-to-$1,000 credit for employers who hire unemployed workers.
To stimulate hiring by the private sector, the new law exempts any private-sector employer that employs someone who had been unemployed for at least 60 days from having to pay the employer’s 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. Your company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of 2010. Additionally, any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, makes the employer eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
• Workers hired after the date of introduction of the legislation (Feb. 3, 2010) are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after March 18 receive the exemption for payroll taxes.

2. Extension of enhanced small business expensing.
The new law gives one year of extra time to enhanced expensing rules, allowing qualifying businesses the option to currently deduct the cost of business machinery and equipment, instead of recovering it via depreciation over a number of years. For tax years beginning in 2010, the maximum amount that a business may expense is $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008 and 2009, but without the HIRE Recovery Act, would have dropped this year to $134,000 and $530,000 respectively.
In our next post, we’ll break down some of the benefits of the payroll tax incentives.

Will these incentives change the way you approach your staffing needs for the rest of the year?

Read the article in the Richmond Times Dispatch (link below) and find out more about the new changes for our firm. http://www2.timesdispatch.com/rtd/business/legal/article/B-SAND26_20100325-221805/333046/

According to reporting by Bloomberg’s Ryan J. Donmoyer (www.bloomberg.com) if the final version of the healthcare legislation passes the Senate, high-income investors will pay higher Medicare taxes, tax breaks for out-of-pocket medical deductions, such as flexible spending accounts, will be limited, and it will cost insurance companies more to pay executives higher salaries. These expanded taxes will help fund the expansion of Medicaid services for the low income citizens and subsidize health insurance to cover millions who don’t currently have health insurance.

In all, the bill would generate $409.2 billion in additional taxes by 2019, according to an analysis by the congressional Joint Committee on Taxation, a nonpartisan agency. According to the Congressional Budget Office, another non-partisan agency that tracks the costs of legislation, says the healthcare bill will impose about $69 billion more in penalties for individuals and businesses who don’t meet mandates to buy health insurance.

Bloomberg’s Donmoyer reports that most of the revenue would come from higher Medicare taxes on about 1 million individuals earning more than $200,000 and about 4 million couples filing jointly who make more than $250,000. The new legislation would, for the first time, apply Medicare taxes to investment income received by these households, beginning in 2013. The 3.8 percent Medicare tax rate would apply to unearned income such as realized net capital gains, dividends, interest, rents and royalties. It wouldn’t apply to other income subject to income taxes, such as interest from municipal bonds and retirement accounts such as 401(k) plans until funds are withdrawn.

Bloomberg also reports that Obama’s budget will raise the present 15 percent tax rate on dividends and capital gains to 20 percent in 2011 for the same high-income tax payers. Adding in 3.8 percent Medicare tax on top of that would mean a new top rate on dividends and capital gains of 23.8 percent. The top tax rates on interest and rental income would rise to as high as about 44 percent, assuming other Obama tax increases on high-earners are enacted. The tax increases are centered on investment income such as capital gains and dividends. These are the categories of income generated by the investors and private business owners who comprise most of our small and medium sized businesses, for example the “Accredited Investors” (as defined by the Securities Act of 1933); those high-net worth individuals who invest in small to medium private investment opportunities.

Some of the other provisions likely to affect individual taxpayers involve the scaling back of tax preferences associated with paying out-of- pocket medical expenses. Starting in 2013, Americans under 65 won’t be able to deduct medical expenses until they exceed 10 percent of income, up from 7.5 percent now; retirees would keep the lower threshold. In addition, the bill would place new restrictions on what can be purchased using special savings accounts funded with pre-tax dollars including HSAs (Health Savings Accounts) starting in 2011. Improper withdrawals from the accounts also would be hit with a new 20 percent tax.

And the legislation for the first time would place a $2,500 limit on what can be contributed to employer-sponsored flexible spending accounts, another type of account funded with pre-tax dollars that can be used to pay for medicines, co-payments, and other health care related expenses. Employers now set their own limits, typically between $3,000 and $5,000 in the absence of a government cap. according to Wage Works, Inc., a San Mateo, California, company that administers 1.5 million accounts, this change would cost an average worker about $625 in tax savings.

The affect of these tax increases will likely make capital gains and dividend income less attractive from a tax perspective and place additional tax burdens on benefits to employees. In addition, any penalties on those businesses that cannot provide health insurance for employees will cause marginally profitable businesses to struggle to maintain profitability. The unintended consequences for small to mid-sized private businesses would be to choke off investment capital and raise mandated expenses and possible penalties. That is a toxic mix for private enterprises coming at a time when those businesses are trying to pull out of the recession.

I have added a few thoughts of my own. While the basic advice is directed to businesses making a pitch to banks, the insights are equally applicable to entrepreneurs who are sending out business plans for prospective investors, or the seller of a business who is preparing a memo for presentation to potential buyers in the M&A context. Let me know if you agree or even have additional points of your own. David Carroll

23 Tips on Presenting your Project
Vitaly Michka, Concord Capital
www. concordcapitalonline.com

1. Be very specific in all aspects. Do not add fluff! This is a red flag to a banker.

2. Make all important information available in an executive summary, and have the summary in the very beginning of the presentation. You should be able to communicate the essence of your plan in three or four pages at most.

3. Have a very basic table of contents with page numbers and follow it.

4. Say what you need and support it with facts, numbers, pictures and charts, not the other way around.

5. Try to keep history, philosophy and personal feelings out of the presentation, unless they are a center point of your business plan.

6. Include information on the management team – education, experience and special achievements and why the team is particularly well suited for the business.

7. Have the document available in pdf or Word format and all calculations in Excel format available for the bankers or buyers to work with, not on the internet. The bank wants all documents presented to them directly. This is your job. The bank will not seek out your information.

8. Make all electronic pictures or other media elements of appropriate size, so they don’t make the document bloated or cumbersome to transmit.

9. Make sure the document is smaller than 10 megabytes, so it will be possible to email. If necessary, break it into smaller pieces.

10. Video presentations – do not stream or vend over the internet – send by Express Mail on a DVD or USB jump drive in the several formats – NTSC and PAL at least; especially for international transactions. You don’t know what format the target audience may use.

11. Try to have as many references as you can for the data you provide in your presentation, in the form of footnotes or endnotes. Don’t take it for granted that just because you state a fact or opinion the reader will believe it.

12. DO NOT send data in zip files.

13. DO NOT make bankers look-up stuff up on the internet.

14. DO NOT send documents that you and your people do not fully understand.

15. DO NOT send any documents that have not been read carefully by you and the people in charge of the project.

16. DO NOT send projects with unverified numbers – triple-check all numbers and calculations; the bank will verify your numbers.

17. DO NOT save money on translation of the documents into English for international deals. Use good translators, familiar with technical and financial terms in your document. Have a native English-speaking person read the documents to make sure that the translations are correct.

18. DO NOT send any information that is assumed, everything must be based on facts: if you do not have a permit for construction – do not tell people that you have one until you have it your hands!

19. DO NOT underestimate the depth of due diligence – all information, including your resume, will be verified.

20. Remember the SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) — you have to present potential problems or weaknesses or you will lose credibility.

21. DO NOT TRY TO SAVE MONEY ON THIS PRESENTATION! Well deserved projects must be presented properly.

22. Prepare your business plan as though PricewaterhouseCoopers will be doing the due diligence on your plan; because, they may very well be.

23. Have several copies of entire presentation printed and bound and be ready to send it via FedEx to the Bankers.

Estate Tax and Possible Changes in 2010

Congress has done the unthinkable and now we are in a year with no estate tax. Everyone expects Congress will “patch” the current law by extending last year’s rules – taxing estates exceeding $3,500,000 – through the end of this year and making that change apply retroactively to January 1. But then, everyone expected Congress to extend last year’s rules before last year ended.

So, what does this mean for you?

If you are single, it will probably make no difference to the way you have made your will and other estate documents unless you have a plan where you gave the exempt amount to your beneficiaries and the amount above the exempt amount to charities. In that case, you should review and may need to change your documents.

If you are married and you had a plan that would create, on the first death, a “Family Trust” for the surviving spouse, under the current rules (no estate tax) it is likely that your documents will give everything to your spouse. If your children are not children of your spouse and you had a “Family Trust” to provide for your spouse and then pass back to your children, you will need to review and may need to change your documents.

If your children are all children of your spouse, you have a choice:
a. Do nothing and hope your survivor will get prompt advice about whether he or she should disclaim any of your assets passing to the survivor so they will instead pass to the “Family Trust” for the survivor and not be taxed as part of the survivor’s estate (see “looming danger” below).

b. Consider amending your documents to provide a trust for the survivor even if you die in 2010 and there is no tax. (Such an amendment could be as simple as providing that if you die in a year when there is no estate tax, that the document will be interpreted as though the 2009 tax rules applied for the purpose of setting up the Family Trust for the survivor).

Why is this important? — The “Looming Danger.”

If Congress does nothing at all (or just extends last year’s rules through 2010 as a “patch” and then does nothing further) starting in 2011 (less than one year), the exemption from estate tax will automatically drop to $1,000,000.

That will mean that if you die this year and you and your spouse have $2,000,000 (for example) and your spouse inherits everything, there will be no tax. But if your spouse then dies with a $2,000,000 estate in 2011, the children will pay over $400,000 in estate taxes.

Everyone expects (yes, that crowd of everyone again) Congress will pass a more permanent extension of the estate tax law setting the tax-free amount at a higher level, but Congress is full of surprises and, with an election coming up, Congress could easily do nothing about further estate taxes (just as happened this year) and let the exemption drop back to $1,000,000.

Whether single or married, it may benefit you to start planning now for that possibility and to review your plan with an trust and estate lawyer to make sure that your documents will send your assets to the beneficiaries and in the way you expected.

In today’s economic environment, businesses are looking to modify and re-structure debt to pull through until the economy turns around. Rather than allowing so many loans to go bad, lenders are working with debtors to re-structure loans in a manner that allows the debtor to stay in business. For example, a lender may allow a debtor to cease making payments for six months in exchange for increasing the interest rate for the life of the loan. Another example would be a lender who might agree to reduce the principal amount of a loan increasing the probability of receiving some return of capital rather than risking that the borrower would stop paying altogether.

In re-structuring debt, a borrower (debtor) needs to be aware of potential tax consequences that will cause the debtor to recognize taxable income even though not receiving any additional payments. If a debtor is relieved of a valid debt (or any portion of a loan), the debtor must recognize ordinary income in the amount of the debt cancelled. Although there are some situations where such “cancellation of indebtedness income” or “CODI” may be excluded, in many situations a debtor must pay tax when relieved of debt.

For example, business X owes Bank $500,000 and Bank agrees to accept $400,000 in full payment of the loan. Because Bank has forgiven $100,000 of indebtedness for X (and no exclusion from income applies), X must recognize $100,000 of ordinary income in the year the debt is forgiven. If X is an individual or the sole owner of a pass through entity (such as a limited liability company), and if X pays tax at the highest income tax rates, the forgiveness of debt results in $35,000 of tax payable to the IRS (plus additional tax for state income tax).

Although the example above appears bad (with the accrual of phantom taxable income), at least the taxpayer can see it coming and try to take steps to avoid it. There are other situations where CODI can accrue even though no actual debt was forgiven. This problem is most severe, and perhaps least fair, in certain debt modifications. Thats right, a business can modify a debt, maybe agree to a higher interest rate, and have to pay tax because the statute will deem CODI to arise.

Accrual of CODI will not occur in all debt modifications, but in some cases such accrual of income can surprise everyone involved. If the debt is traded on an “established market”, then any significant modification to the debt will be deemed to be the re-purchase of the debt by the debtor at the debts fair value and then the re-issuance of new debt to the lender. When such debt is deemed to be re-purchased by the debtor, the debt’s fair value will most likely be less than the face amount. For example, business X owes Bank $1,000,000, but at the time of the modification, the fair value of the debt is $700,000. X will be deemed to have purchased the debt for $700,000, and accrue CODI for the remainder of the debt of $300,000. The debtor is then deemed to have issued to the lender new debt. Therefore, even if the only debt modification is that X agreed to an adjusted interest rate, X will have to be tax on $300,000 of phantom income.

The problem described above occurs only if the debt is traded on an established market. However, the meaning of “traded on an established market” can be broader than it at first appears. The Treasury Regulations describe a debt as traded on an established market if: (i) it is traded on a registered national securities exchange, interdealer quotation system, or certain foreign exchanges; (ii) it is traded on a designated contract market or “interbank market”; (iii) it appears on a system of general circulation . . . that provides reasonable basis to determine fair market value by disseminating either recent price quotations (including rates, yields, or other pricing information) of one or more identified brokers, dealers, or traders or actual prices (including rates, yields, or other pricing information) of recent sales transactions (a quotation medium); or (iv) it is a debt instrument for which “price quotations are readily available from dealers, brokers, or traders”. Although the description contained above is somewhat simplified, in today’s banking environment, many loans taken from large national banks will fall into one of the categories listed above and therefore the debt will be deemed to be “traded on an established market”.

Although it is unclear what modifications will be deemed to be “significant modifications”, clearly an interest rate change will qualify. Also, some modifications to the number or terms of payment will qualify.

Congress has taken action to provide some relief for taxpayers getting caught in this CODI trap during the current economic conditions by adding new Section 108(i) to the Internal Revenue Code. New Section 108(i) allows taxpayers to elect to defer taxation of CODI on “applicable debt instruments” on transactions which occur in 2009 or 2010. If a taxpayer accrues CODI during 2009 or 2010, the taxpayer can elect to defer recognizing such income (and thus deferring the obligation to pay tax on such income), until 2014. The taxpayer can then further defer the recognition of such income by recognizing only a pro rata portion for each of the years 2014 – 2018. Therefore, even though the taxpayer will eventually have to pay the tax on such income, the taxpayer can elect to defer that obligation to later years (and spread out the pain over a 5 year period).

An “applicable debt instrument” is any debt instrument issued: (i) by a corporation; or (ii) by either an individual or a pass through entity (such as a partnership or limited liability company) if such debt was issued in connection with a trade or business.

The moral is that you need to involve your tax advisor in most business transactions that involve loan modifications. Even if you simply agree to pay more interest (and thus not receive any increase to your net wealth), you could suffer an adverse tax consequence.

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John M. Vandenhoff is a business attorney at Sands Anderson Marks & Miller, PC., in Richmond and holds a L.L.M. degree, which includes intensive education in tax law, along with his law degree. He can be reached at (804) 783-7269 .

The new address is 150 Peppers Ferry Rd NE , Christiansburg, and the phone numbers are (540) 260-9011 (main); (540) 260-0022 (fax); and (800) 881-8803 (toll free).

“We have a strategic plan in place directing our growth in the coming years and an excellent working relationship with First Bank & Trust, making their building the most prudent choice for our new home,” explains James E. Cornwell, Jr., the managing shareholder.

In addition to Cornwell, the office includes N. Reid Broughton, Michael R. Bedsaul and Stephen V. Durbin among the attorneys. Their law practices focus on business operations and growth, municipal law, municipal finance, delinquent real estate tax collection, real estate, zoning and land use, corporate law, employment law and creditors’ rights. Clients include many local governments, departments of social services, municipal and development authorities, privately owned companies, corporate executives and individuals. The firm has had a local office serving clients in the southwest part of the state since 1995. One of the office’s bankruptcy and creditors’ rights attorneys, Peter M. Pearl, is located in downtown Roanoke and will remain in that office location.

Stock Grants and Phantom Income

You own a small and very successful private company. You know that you would never have become so successful without the dedication and hard work of your trusted key managers. You have one particularly valuable manager who you would like to reward with some ownership of the company. He is a valued manager and has asked you before if you would consider giving him some equity. You decide that a 10% ownership of the common stock of the company would be in order, so you grant him shares equivalent to a 10% ownership while you maintain your 90% ownership. You know your manager will be very thankful. Next April your new co-owner comes to you and asks you how he’s going to pay his federal and state taxes on the $300,000 in compensation income (the taxes for which could be as high as $90,000) that he has received when he has no cash to pay the taxes.

You have just saddled your valued manager with a tax burden that he or she cannot pay. You say to yourself: no good deed goes unpunished — how could this have happened? This is, unfortunately, an all too common occurrence. A version of what is known as “Phantom Income” —- taxable income with no accompanying cash to pay the tax. The employee cannot pay his taxes with stock in the company and otherwise has no cash to make the tax payment. There are many ways that businesses create Phantom Income and this is one of the most common. Boards and equity owners of small and medium-size companies wanting to reward their dedicated senior management with ownership often do not take into account the tax aspects of stock grants.

If your company gives an employee stock without requiring a payment from that employee, the employee has received a stock grant. When a taxpayer receives a grant of vested stock, in tax jargon: “stock that is not subject to a substantial risk of forfeiture,” then that person has received compensation income for the year they receive it. The amount of the income is equal to the fair market value of the stock at the time they receive it, reduced by the amount they paid for it, if any. If the employee pays nothing for it, the entire fair market value of the stock is taxable to them as ordinary income. In addition, the employee must pay federal and state withholding and the employee’s share of Social Security tax. If an executive receives a 10% ownership interest in a company that has a stockholder’s equity at fair market value of $3,000,000, without discounts and deductions, the gross ordinary income could be as high as $300,000. That is hard to swallow when you are not receiving any additional cash to pay the taxes.

Rewarding valuable senior management with ownership of the company is a good instinct . But it does take some careful advance planning. If you’re in a situation where the company has just become established and has not yet grown enough to warrant an ascertainable fair market value, this may be the time to distribute the benefits of equity to your management team. But many companies do not know who the key players will be at the beginning of corporate life. Often it is only much later that the company knows who it wants to reward and by that time the fair market value of the business could be substantial.

It is important to consult your company’s tax lawyer or accountant before the company creates a plan to reward their employees with company stock. There are other alternatives to achieve the same objectives without subjecting the employees to Phantom Income or at least decrease the exposure to Phantom Income, alternatives such as stock options, cash bonuses, stock appreciation rights, profits interests in Limited Liability Companies and Partnerships, but each of these alternatives demands careful planning and have their own set of traps for the unwary.

When you think of rewarding your employees with ownership, consult your lawyers and accountants and make sure you are not giving them an unnecessary or unplanned tax burden along with a piece of the rock.

The interesting part of the survey indicates that, while the total number of transactions completed decreased by 44% compared to 2007 and 58% percent compared to the first half of 2008, the average dollar value of the transactions decreased by only 22% compared to 2007 and 12% compared to the first half of 2008. The average transaction size increased to $13.5 million compared to $9 million in 2007 and $7.8 million in the first half of 2008. The increase in transaction size seems to indicate that the difficulties in the credit markets have slowed smaller deals more than the larger deals in the middle market.Manufacturing continued to be the number one industry in both terms of the number of transactions and the total dollar volume.

There is no question that the past year has been a difficult time for mergers and acquisitions. Many sellers are undoubtedly waiting for a better economic environment before considering a sale of the business, while buyers are searching for bargains. By some estimates there is as much as $400 billion in private equity capital that is sitting on the sidelines waiting for the economic picture to clear. However, the loosening of credit availability will have to occur before deal momentum picks up.

For many in the investment banking community most of the requirements of the Series 7 license do not apply directly to their work. Investment bankers doing mergers and acquisitions often complain that the Series 7 exam does not relate well to what they do day-to-day and is not a good test of what they need to know to be effective investment bankers. Beginning November 2, 2009, amendments to NASD Rules 1022 and 1032 require individuals whose activities are limited to investment banking and principals who supervise such activities to pass the new Limited Representative – Investment Banking Qualification Examination (Series 79 Exam).

The Financial Industry Regulatory Authority (FINRA) has developed this exam “to provide a more targeted assessment of the job functions performed by the individuals that fall within the registration category.” This exam seems well suited for transaction professionals in M&A boutiques, financial intermediaries, and business brokers who work on mergers, acquisitions, buyouts, refinancings, and financial restructuring as well as public investment banking.

NASD Rule 1032(i) requires an associated person to register with FINRA as a Limited Representative – Investment Banking (Investment Banking Representative) and pass a corresponding qualification examination (Series 79) if such person’s activities involve:

1. Advising on or facilitating debt or equity securities offerings through a private placement or a public offering, including but not limited to origination, underwriting, marketing, structuring, syndication, and pricing of such securities and managing the allocation and stabilization activities of such offerings, or
2. Advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions, including but not limited to rendering a fairness, solvency or similar opinion.

The registration category does not cover individuals whose investment banking work is limited to public (municipal) finance or direct participation programs as defined in NASD Rule 1022(e)(2). Moreover, individuals whose investment banking work is limited to effecting private securities offerings as defined in NASD Rule 1032(h)(1)(A) may continue to function in such capacity by registering as a Limited Representative – Private Securities Offerings and passing the corresponding Series 82 exam.

The topics covered on the exam include: (i) collection, analysis and evaluation of data; (ii) underwriting/new financing transactions, types of offerings, registration of securities; (iii) mergers, acquisitions, tender offers and financial restructuring transactions; and (iv) general securities industry regulations.

What about those registered representatives who already have their Series 7 license? The good news is that these reps will be able to “opt in” during a six-month window and receive the qualification for the new investment banking representative license without having to take the exam and will retain their Series 7 registration. Investment bankers who hold the Series 7 registration, as well as those who have passed and are registered with a “Series 7-equivalent exam” may opt in to the Investment Banking Representative registration, provided that, as of the date they opt in, such individuals are engaged in investment banking activities covered by Rule 1032(i). Those individuals who choose to opt in will retain their Series 7 or Series 7-equivalent registered representative registration in addition to the investment banking registration. After May 3, 2009, any person who wishes to engage in the specified investment banking activities will be required to pass the Series 79 Exam or obtain a waiver.

The registration and qualification requirements for Investment Banking Representatives will become effective November 2, 2009. The six-month opt-in period will begin on that date and end May 3, 2010.

Go to http://www.finra.org/Industry/Regulation/Notices/2009/P119462 for a FINRA’s Regulatory Notice, which summarizes the new Limited Representative Investment Banker category and the Series 79 exam.