Friday, March 26, 2010

New York Sales Tax Trap

For many business owners, the LLC form of doing business is the preferred format. An LLC provides a number of benefits to the owner by limiting liability, providing for a single tax (no tax at the entity level) and by providing flexibility in capitalization and ownership. For those LLCs which are doing business in the State of New York, however, this form of business can be deadly. In a decision handed down on December 23, 2009 by the New York Tax Appeals Tribunal, the panel upheld the provision of the New York Sales and Use Tax law that imposes absolute personal liability on any member of a partnership or limited liability company for all of the unpaid liabilities of the partnership or LLC in which they hold an interest.

In the Matter of Santo DTA821797, N.Y.S. Tax App. Triv. December 23, 2009, the court found that Joseph P. Santo who entered into a business venture structured in the form of an LLC was personally liable for unpaid sales taxes. Mr. Santo entered into this business venture (a restaurant) with others. Mr. Santo contributed no capital to the LLC, but later loaned the LLC all of his savings - $15,000. Another member (Scotti) was in charge of all the financial operations of the LLC. In 2005, the restaurant opened, but had difficulty paying its construction creditors. In May of 2006, the tax department issued a Notice of Determination to Mr. Santo finding him liable for almost $200,000 of the LLC’s unpaid sales tax.

At trial, the Administrative Law Judge applied the “duty to act standard” found in the statute, and determined that Mr. Santo was not responsible for the financial management of the LLC and, therefore, was not responsible to pay the sales tax. In December 2009, however, the Appeal Tribunal reversed the Administrative Law Judge holding that it was an error for the Administrative Law Judge to treat Mr. Santo as if he were an officer or employee of a corporation. The Tribunal stated that Mr. Santo was a member of an LLC, and as with members of a partnership, such members are subject to the absolute liability standard and “subject to per se liability for the taxes due from the LLC.”

The statute involved in the decision is N.Y. Tax Law Section 1131. The applicable provision is Section 1 of the statute entitled “Persons Required to Collect Tax.” A careful reading of the statute indicates that a person required to collect tax is “any member of a partnership or limited liability company.” The Tribunal interpreted this provision of the Act to impose per se (absolute) liability on any member of a limited liability company.

This decision can be a ticking time bomb for many taxpayers. Moreover, the statue does not only apply to New York limited liability companies, but to all limited liability companies which would be subject to collecting New York sales tax. That would mean any LLC or partnership that was qualified to do business in New York no matter where they were formed.

It would seem that there is a “glitch” in the statute, however, the New York State tax department has issued numerous assessments against individuals who invested small amounts of money to LLCs formed to operate restaurants, bars or similar ventures in exchange for small minority interests in the LLCs with absolutely no right or ability to oversee their operations. It is common for restaurants and similar business to fail and have unpaid sales tax. Often these businesses have little or no records and assessments are made based on estimates which are often much greater than the actual liability. The tax department’s position is that each individual member of the LLC (as well as individual members of upper-tier LLCs) is jointly and severely liable for the full amount of the tax, penalties and interest.

Clients who find themselves in this position should be advised to review the structure of their business to determine their exposure and to modify their business to avoid personal liability.

Wednesday, March 24, 2010

The True Cost of Health Care

Thing We Should Have Been Told Before The Vote

Tax Changes Relating to Universal Health Coverage Mandate

Penalty for remaining uninsured

Effective for tax years beginning after Dec. 31, 2013, non-exempt U.S. citizens and legal residents would have to maintain minimum essential coverage. or pay a penalty. Those failing to maintain minimum essential coverage in 2016 would be subject to a penalty equal to the greater of: (1) 2.5% of household income over the threshold amount of income required for income tax return filing, or (2) $695 per uninsured adult in the household. The fee for an uninsured individual under age 18 would be one-half of the fee for an adult. The total household penalty wouldn't exceed 300% of the per adult penalty ($2,085), nor exceed the national average annual premium for the “bronze level” health plan offered through the Insurance Exchange that year for the household size.

The per adult annual penalty would be phased in as follows:
$95 for 2014; $325 for 2015; and $695 in 2016. For years after 2016, the $695 amount would be indexed to CPI-U, rounded to the next lowest $50. The percentage of income would be phased in as follows: 1% for 2014; 2% in 2015; and 2.5% beginning after 2015. If a taxpayer files a joint return, the individual and spouse would be jointly liable for any penalty payment.


Among those individuals who would be exempted from the penalty: Individuals who cannot afford coverage because their required contribution for employer sponsored coverage or the lowest cost “bronze plan” in the local Insurance Exchange exceeds 8% of household income; those who are exempted for religious reasons; and those residing outside of the U.S.

Low-income tax credits for participating in health exchanges

For tax years ending after 2013, tax credits would be available for individuals and families with incomes up to 400% of the federal poverty level ($43,420 for an individual or $88,200 for a family of four) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. These individuals and families would have to obtain health care coverage in newly established Insurance Exchanges in order to obtain credits. Additionally, effective on the enactment date, a “cost-sharing subsidy” would be provided to low income individuals to help with health insurance costs.

Employer responsibilities

Effective for months beginning after Dec. 31, 2013 an “applicable large employer” (generally, one that employed an average of at least 50 full-time employees during the preceding calendar year) not offering coverage for all its full-time employees, offering minimum essential coverage that is unaffordable, or offering minimum essential coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60%, would have to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. The penalty for any month would be an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by one-twelfth of $2,000.

Also, an applicable large employer that offers, for any month, its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer sponsored plan would be subject to a penalty if any full-time employee is certified to the employer as having enrolled in health insurance coverage purchased through a State exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to such employee or employees.

“Free choice vouchers.”

After 2013, employers offering minimum essential coverage through an eligible employer-sponsored plan and paying a portion of that coverage would have to provide qualified employees with a voucher whose value could be applied to purchase of a health plan through the Insurance Exchange.

Qualified employees would be those employees: who do not participate in the employer's health plan; whose required contribution for employer sponsored minimum essential coverage exceeds 8%, but does not exceed 9.5% of household income; and whose total household income does not exceed 400% of the poverty line for the family. The value of the voucher would be equal to the dollar value of the employer contribution to the employer offered health plan.

Tax credits for small employers offering health coverage

Effective for tax years beginning after 2009, a qualified small employer would be given a tax credit for nonelective contributions to purchase health insurance for its employees. A qualified small business employer for this purpose generally would be an employer with no more than 25 full-time equivalent employees (FTEs) employed during the employer's tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit would be available only to an employer with 10 or fewer FTEs and whose employees have average annual fulltime equivalent wages from the employer of less than $25,000. These wage limits would be indexed to the Consumer Price Index for Urban Consumers (“CPI-U”) for years beginning in 2014.

For tax years beginning in 2010 through 2013, the credit would be 35% for small employers with fewer than 25 employees and average annual wages of less than $50,000 who offer health insurance coverage to their employees. In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

Dependent coverage in employer health plans

Effective on the enactment date, the health reform measure would extend the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change would also be intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. Also, self-employed individuals would be permitted to take a deduction for any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Health-Related Revenue Raisers

Excise tax on high-cost employer-sponsored health coverage

For tax years beginning after Dec. 31, 2017, the bill would place a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage would apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions.

The tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans would be disregarded in applying the tax. The dollar amount thresholds would be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010.

Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool.
The excise tax would be levied at the insurer level. Employers would be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

New employer reporting responsibilities

For tax years beginning after Dec. 31, 2010, employers would have to disclose the value of the benefit provided by them for each employee's health insurance coverage on the employee's annual Form W-2.

Additional Hospital Insurance Tax (HI) for high wage workers

For tax years beginning after Dec. 31, 2012, the HI tax rate would be increased by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly); these figures are not indexed.

Surtax on "High Earner" unearned income

For tax years beginning after Dec. 31, 2012, a 3.8% surtax called the Unearned Income Medicare Contribution, would be placed on net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return). Net investment income would be interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income would be reduced by properly allocable deductions to such income.

New limit on health FSA contributions

The amount of contributions to health flexible spending accounts (FSAs) would be limited to $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount would be inflation indexed after 2013.

Restricted definition of medical expenses for employer provided coverage
For purposes of employer provided health coverage (including health reimbursement accounts (HRAs) and health flexible savings accounts (FSAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs)), the definition of medicine expenses deductible as a medical expense would generally be conformed to the definition for purposes of the itemized deduction for medical expenses. But this change would not apply to doctor prescribed over-the-counter medicine. Thus, the cost of over-the-counter medicine (other than insulin or doctor prescribed medicine) could not be reimbursed through a health FSA or HRA. In addition, the cost of over-the-counter medicines (other than insulin or doctor prescribed medicine) could not be reimbursed on a tax-free basis through an HSA or Archer MSA. These changes would be effective for tax years beginning after Dec. 31, 2010.

Increased tax on nonqualifying HSA or Archer MSA distributions

The additional tax for HSA withdrawals before age 65 that are used for purposes other than qualified medical expenses would be increased from 10% to 20%, and the additional tax for Archer MSA withdrawals that are used for purposes other than qualified medical expenses would be increased from 15% to 20%, both effective for distributions made after Dec. 31, 2010.
Modified threshold for claiming medical expense deductions

For tax years beginning after Dec. 31, 2012, the adjusted gross income (AGI) threshold for claiming the itemized deduction for medical expenses would be increased from 7.5% to 10%. However, the 7.5%-of-AGI threshold would continue to apply through 2016 to individuals age 65 and older (and their spouses).

Deduction for employer Part D would be eliminated

The deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees would be eliminated, for tax years beginning after Dec. 31, 2012.

Industry-specific revenue raisers

The following revenue raising changes would be imposed on health related industries:

● A new deduction limit on executive compensation would apply to insurance providers.

● Pharmaceutical manufacturers and importers would have to pay an annual flat fee
beginning in 2011 allocated across the industry according to market share.

● Manufacturers or importers of medical devices would have to pay a 2.3% of the sale price is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of the device.

● Health insurance providers would face an annual flat fee on the health insurance sector effective for calendar years beginning after Dec. 31, 2013.... The indoor tanning industry would be hit with a 10% excise tax on indoor tanning services, effective for services provided on or after July 1, 2010.

● Non-profit Blue Cross Blue Shield organizations would have to maintain a medical loss ratio of 85% or higher in order to take advantage of the special tax benefits provided to them, including the deduction for 25% of claims and expenses and the 100% deduction for unearned premium reserves.

Non-Health Related Revenue Raisers

Corporate information reporting

Businesses that pay any amount greater than $600 during the year to corporate providers of property and services would have to file an information report with each provider and with IRS, effective for payments made after Dec. 31, 2011.

Codification of economic substance doctrine and imposition of penalties

The economic substance doctrine is a judicial doctrine that has been used by the courts to deny tax benefits when the transaction generating these tax benefits lacks economic substance. The courts have not applied the economic substance doctrine uniformly. The manner in which the economic substance doctrine should be applied by the courts would be clarified and a penalty would be imposed on understatements attributable to a transaction lacking economic substance. These changes would be effective for transactions entered into after the enactment date.
Estimated taxes for large corporations

Other Tax Changes

Simple cafeteria plans for small businesses

For tax years beginning after 2010, a new employee benefit cafeteria plan to be known as a Simple Cafeteria Plan would be established. This plan would be subject to eased participation restrictions so that small businesses could provide tax-free benefits to their employees; it would include self-employed individuals as qualified employees.

Liberalized adoption credit and adoption assistance rules

For tax years beginning after Dec. 31, 2009, the adoption tax credit would be increased by $1,000, made refundable, and extended through 2011. The adoption assistance exclusion also would be increased by $1,000.

New credit for new therapies

Effective for expenses paid or incurred after Dec. 31, 2008, in tax years beginning after that date, a two-year temporary credit would be created, subject to an overall cap of $1 billion, to encourage investments in new therapies to prevent, diagnose, and treat acute and chronic diseases.

New exclusion for certain health professionals

Payments made under any State loan repayment or loan forgiveness program that is intended to provide for the increased availability of health care services in underserved or health professional shortage areas would be excluded from gross income, effective for amounts received by an individual in tax years beginning after Dec. 31, 2008.