September, 2013 | RKL LLP
Posted on: September 23rd, 2013

New 3.8% Medicare Surtax on Net Investment Income

new medicare surtax on net investment incomeWith the imposition of the new Medicare Surtax (“Surtax”) effective January 1, 2013, the U.S. income tax system has become more complex and costlier to “high income” taxpayers.  This tax is an additional 3.8% surcharge levied on the unearned income of these individuals. To learn more about income subject to the Surtax and some simple ways to minimize your tax impact, read on.

By definition, “high income” taxpayers are those with modified adjusted gross income (“MAGI”) in excess of the following thresholds:

  • $200,000 for single taxpayers
  • $250,000 for married taxpayers filing joint returns
  • $125,000 for married taxpayers filing separate returns

What’s Included? What’s Not?

Income subject to the Surtax, otherwise known as Net Investment Income (“NII”), includes: interest, dividends, net capital gains, rental income, royalties and income derived from passive activities.  NII also includes business income from trading in financial instruments or commodities (i.e. hedge fund income).

The following income is excluded from NII:  municipal bond interest; investment income and net gains from the sale of property used in activities in which the taxpayer materially participates; tax-free gains from the sale of a principal residence; and qualified retirement plan distributions.  It should be noted that although qualified retirement plan distributions are excluded from NII, these distributions increase MAGI and, in turn, may trigger the Surtax.

Adding It Up: How Net Investment Income is Calculated

To calculate NII, gross investment income is reduced by allocable expenses.  Certain investment expenses will be subject to the 2% AGI floor used in computing miscellaneous itemized deductions.  Once NII has been calculated, the amount subject to the Surtax equals lesser of  1) NII OR 2) the excess of the taxpayer’s MAGI over the applicable threshold.

As previously stated, rental income from passive activities is subject to the Surtax; whereas, rental income earned in a taxpayer’s trade or business is not.  Real estate investors need to pay close attention to how their rental activities are classified because the imposition of the Surtax hinges on this determination.

How to Minimize the Surtax’s Impact

Taxpayers can minimize the impact of the Surtax by decreasing their NII and/or MAGI.  Simple strategies include:

  • Investing in tax-exempt bonds whose earnings are excluded from NII.
  • Timing income so that NII is limited and/or MAGI falls below the threshold amount.
  • Rebalancing investment portfolios by acquiring growth products rather than income producing products.   Although both types of investments generate NII, by investing in growth products, taxpayers can control the timing of the income to limit the Surtax’s impact.

Taxpayers can also implement more complex strategies to minimize the Surtax’s effect through the use of charitable remainder trusts, life insurance policies and family owned partnerships, LLCs and S corporations.

Trusts and estates whose income is taxed at the highest tax rate are also subject to the Surtax.  The amount subject to tax is the lesser of the 1) undistributed net investment income OR 2) excess of the adjusted gross income over the highest tax bracket amount ($11,950 for 2013).

If you would like to learn more about Medicare Surtax and ways to avoid it, please contact your RKL service provider or Ann Marie G. Davis at (717) 399-1621.

Contributed by Ann Marie G. Davis, CPA, JD, a supervisor in RKL’s Tax Services Group. Ann Marie has over 20 years experience in serving individual clients with their tax planning needs specializing in high net worth individuals and tax controversy issues. 

Posted on: September 18th, 2013

What Will the New Tangible Asset Regulations Mean to You?

New Tangible Asset RegulationsAfter some lengthy delays, the IRS finally issued the much-anticipated Final Tangible Asset Regulations on September 13th.  The Final Regulations, along with new Proposed Regulations, will have a significant impact on the treatment of amounts paid to acquire, produce or improve tangible property.  The good news for taxpayers is that more companies will now be eligible for tax benefits under the “simplified” Final Regulations. The challenging part of this news is that compliance with the rules will require some additional effort and resources.

Final Regulations

The Final Regulations replace Regulations originally proposed in August 2006, re-proposed in March 2008, and issued in temporary form in December 2011.

The Final Regulations provide a framework for distinguishing capital expenditures from deductible business expenses. The rules in the Proposed and Temporary Regulations had been criticized as “too complex” and “administratively burdensome” by several commentators, including the American Institute of Certified Public Accountants. The Regulations in Final form include a number of new safe harbors and simplification rules. However, compliance with the new rules will still require effort and allocation of resources from all taxpayers who acquire, produce or improve tangible property, regardless of the taxpayer’s size or level of sophistication.

Even those taxpayers who already made changes to comply with the Proposed or Temporary Regulations will want to re-address their positions as the Final Regulations differ from the Proposed or Temporary Regulations in many respects.

The IRS has indicated that separate procedures will be provided under which taxpayers may obtain automatic consent to change to a method of accounting provided in the Final Regulations. These procedures may modify or replace some of the 19 new automatic accounting method changes that the IRS authorized after the issuance of the Temporary Regulations nearly two years ago.

The 222-page document containing the Final Regulations is scheduled to be published in the Federal Register on September 19, 2013 and can be accessed on the Federal Register’s website.  The Final Regulations apply to tax years beginning on or after January 1, 2014.  However, taxpayers can elect to apply the Regulations to tax years beginning on or after January 1, 2012.

Proposed Regulations

The new Proposed Regulations change the disposition rules that were in the previously issued Repair Regulations. The old disposition rules were deemed by many commentators to be some of the most difficult to apply and administer, both from a taxpayer and an IRS perspective.

Among other changes, the new Proposals allow significantly more flexibility on the treatment of dispositions of structural components of buildings and will be welcomed news for taxpayers who do not have records or resources to allocate the building costs in their depreciation records into all of the various building systems, a process that was required in the previous rule.  Still, taxpayers would have available the election to do so if it benefits them under the new Proposed Rules.

These Regulations are generally proposed to apply to tax years beginning on or after January 1, 2014.  A public hearing on the Proposals has been scheduled for December 19, 2013.

Need guidance on how the new Tangible Asset Rules will impact your company? RKL’s Tax Services Group is well-versed and ready to assist companies with these complex new Regulations. Contact your RKL tax advisor to learn more.

Contributed by Robert M. Gratalo, CPA, MST, a partner in RKL’s Tax Services Group. Rob specializes in federal and state taxation of privately held businesses in the construction, manufacturing and distribution, real estate development, architecture and engineering and service industries.


Posted on: September 17th, 2013

CPBJ Names Lakatosh and Cassel to “Forty Under 40”

RKL awardsFollowing in a tradition of outstanding young leaders at RKL, team members Wendy Lakatosh and Chris Cassel were named to the Central Penn Business Journal’s 2013 “Forty Under 40” awards list. The award honors 40 young business leaders under the age of 40 for their commitment to business growth, professional excellence and community service. The two will be honored at an event scheduled for Wednesday, October 16 at the Hilton Harrisburg.

Wendy is a partner in RKL’s Audit Services Group. Wendy has extensive experience serving as a client advisor for a variety of clients, from small, private, middle-market entities to large, multi-location companies in the manufacturing, distribution and consumer product industries, as well as significant experience in auditing employee benefit plans.

A member of the RKL team since 2010, Wendy helped expand RKL’s services into the York market. In January 2013, she was admitted as a partner with the firm. Wendy has grown her practice and professional reputation through hard work, an intense focus on client service and her approachable leadership style.

Wendy is a graduate of Shippensburg University. Outside the office, she contributes her time to her community serving as the treasurer of the Pleasant View Parent-Teacher Organization; a board member of Service Coordination of South Central Pennsylvania; and a finance committee member of Guinston Presbyterian Church.

A new member of the Kuntz Lesher Capital (KLC) team, an investment advisory and financial planning subsidiary of RKL, Chris Cassel serves as vice president. Chris is responsible for serving clients’ portfolio management and retirement planning needs, as well as helping grow KLC’s client base.

Prior to joining KLC, Chris worked as a senior manager and associate financial advisor for a regional accounting and wealth management firm. He is a graduate of Shippensburg University with a degree in finance. In addition to his education in finance, Christ earned several broker dealer registrations and received licensure in life, health and accident insurance, as well as fixed annuities, during college.

Chris is active in supporting his community serving a board and finance committee member with the Boys and Girls Club of Harrisburg and as the co-chair of the United Way of the Capital Region Bridges Society.

Learn more about Central Penn Business Journal’s “Forty Under 40.”

Posted on: September 10th, 2013

IRS Federal Tax Changes for Legally-Married, Same-Sex Couples

PA Same-Sex Married Couples Federal TaxOn August 29, the IRS announced that all legally married same-sex couples will be treated as married for federal tax purposes, effective for returns filed on or after September 16, 2013. This includes Federal income tax, gift tax, estate tax, payroll tax and more. The IRS clarifies that this not only affects same-sex couples living in states that recognize same-sex marriage, but it also applies to same-sex couples that are wed in a state that recognizes same-sex marriage, regardless of where they currently live.

For example, if a Pennsylvania same-sex couple legally marries in New York State, and then returns to live in Pennsylvania, that couple would then be required to file as Married-Filing-Joint or Married-Filing-Separately on their federal income tax return.  In addition to the requirement for 2013 and all subsequent years, the IRS gives same-sex couples the option to amend any prior year returns which still have an open statute of limitations, if it would benefit the couple.  These years would generally include 2010-2012.

Depending on each couple’s tax situation, the effects of this change will allow either a great opportunity to receive a large refund or it will be a very expensive change. There could be both benefits and drawbacks resulting from the capital loss carryover rules, passive activity loss rules, and limitations on charitable or medical deductions.  In addition, taxation of social security benefits, tax credits, Alternative Minimum Tax calculations, and preclusion of the Head of Household filing status must be considered.

There are some very important dates to keep in mind for this change:

  • September 16, 2013. If a couple being affected by this law has not filed his or her 2012 tax return by the enactment date of this change, they will be required to file as married for 2012, as well.  Third-quarter estimates may need to be recalculated to account for the change in filing status and the effects of the combined income and deductions.
  • The date three years after the date the 2009 return was filed.  Assuming both spouses extended their 2009 return and filed late in the summer, this is when the statute of limitations ends for 2009, and an amended return may still be possible.
  • December 31, 2013 – Tax implications should be the last thing considered when planning a wedding, but a couple (both same-sex and opposite-sex) may want to delay or push-up the nuptials to accomplish their desired tax results.
  • April 15, 2014, 2015, 2016 –These dates generally close the statute of limitations on amending un-extended returns for 2010, 2011, and 2012.

If you would like to learn more about the possibility of amending prior-year returns or need to update calculations for 2013 and beyond, please contact your RKL service provider or Molly L. Ramos at (717) 291-0656.

Contributed by Molly L. Ramos, CPA, a manager in RKL’s Tax Services Group. Molly specializes in individual tax, trusts, estates, gifts and not-for-profit organizations.

Posted on: September 6th, 2013

Family Dinner Meeting Sponsored by RKL

What does “Playing Fair” mean in your family business? On Thursday, September 26, a dinner program hosted by the Delaware Valley Family Business Center will help attendees answer this question through the journeys of two successful family businesses.

RKL is pleased to sponsor this program to benefit the many family-owned businesses that are integral to the Eastern PA business community. If you own or are involved in the management of a family-owned business, you won’t want to miss this chance to hear directly from Ted Lentz, president of Lentz Milling, and Richard Abrams, chair, and son Ben, president of Consolidated Scrap Resources, as they share their experiences in moving their family businesses forward.

We encourage our family-owned business clients to take advantage of this opportunity to connect, learn and grow with your peers by attending the dinner meeting. To register, click here.


Posted on: September 4th, 2013

Record Retention Guidelines for Business

How Long Should I Keep Records?

While there are no absolute rules regarding record retention, these generally accepted guidelines apply to most businesses and situations. Download a PDF version.

Accident Reports 7 years
Accounts Payable/Receivable Ledgers 7-10 years
Audit Reports Permanent
Bank Reconciliations 1 year or as needed
Capital Stock and Bond Records Permanent
Cash Books Permanent
Chart of Accounts Permanent
Checks (canceled, routine) 7 years
Check (canceled, important) Permanent
Corporate Records (Stock, Board Minutes) Permanent
Contracts and Leases (expired) 3 years
Contracts and leases in effect 7 years
Correspondence (general) 3 years
Correspondence on legal matters Permanent
Deeds, Mortgages, Bills of Sale Permanent
Depreciation Schedules Permanent
Duplicate Deposit Slips 1 year
Employee Personnel Records (terminated) 7 years
Employment Applications 3 years
Expense Analyses and Distribution Schedules 7 years
Financial Statements Permanent
General and Private Ledgers Permanent
Insurance Policies (expired) 3 years
Insurance Records, Claims, Policies Permanent
Internal Audit Records 3 years
Inventories 7 years
Invoices 7 years
Journals Permanent
Notes Receivable Ledgers 7 years
Option Records (expired) 7 years
Payroll Record Summaries 7 years
Petty Cash Vouchers/Receipts 3 years
Physical Inventory Tags 3 years
Plant Cost Ledger 7 years
Property Appraisals Permanent
Property Records Permanent
Purchase Orders 1 year
Purchase Orders (Purchasing Dept. Copy) 7 years
Receiving Sheets 1 year
Requisitions 1 year
Sales Records 7 years
Savings Bond Records 3 years
Scrap and Salvage Records 7 years
Stenographer’s Notebooks 1 year
Stock and Bond Certificates (canceled) 7 years
Subsidiary Ledgers 7 years
Tax Returns (1 copy) and Worksheets Permanent
Time Books 7 years
Trade Mark Registrations Permanent
Voucher Register/Schedules 7 years
Vouchers for payments to vendors and employees 7 years

Have specific questions regarding record retention for your business? Contact your CPA at RKL for more information.


Posted on: September 3rd, 2013

Brown Among PICPA’s “Young Leaders” for 2013-2014

stephanieRKL is pleased to announce that Stephanie E. Brown, CPA, has been named to the Pennsylvania Institute of Certified Public Accountants’ 2013-2014 Young Leaders Award list for her demonstrated commitment to the accounting profession and to her community.

Stephanie, along with her peers in the accounting industry from across the Commonwealth, will be honored at the PICPA’s Leadership Conference on Monday, September 23 at the Best Western Premier in Harrisburg, PA. Recipients are selected based on their active involvement with the PICPA and/or their volunteerism in the community.

Stephanie is a supervisor in RKL’s Tax Services Group. She is an active participant in PICPA Emerging CPAs, PICPA Reading Chapter, Greater Reading Young Professionals, AICPA, RKL’s Young Professionals Committee, vice president of Happy 2 Be Home (nonprofit organization) and an active member of New Hanover UMC. Brown is a graduate of York College of Pennsylvania and resides in Pottstown, PA.