2013 Payroll Information

Multiemployer Pension Plan Disclosure Requirements

Since many construction companies rely on union workers, multiemployer pension plans are quite common.  These plans are designed to allow union workers to accrue pension benefits in a single pension plan for their retirement.  The plans often work quite well, but they can run into issues when they are underfunded – an increasingly common occurrence in recent years.  Because of this, the Financial Accounting Standards Board (FASB) has issued a new standard that requires additional disclosures regarding a company’s participation in multiemployer pension plans.  These changes take effect for years ending after December 15, 2012.

What You Can Expect:
Previously, companies were required to disclose their total contributions to multiemployer plans in which they participate. For years ending after December 15, 2012, employers will be required to provide additional information related to multiemployer plans in their annual financial statements including:

1.  Legal name, plan number and employer identification number of all plans in which you participate
2.  The amount of employer contributions made to each significant plan
3.  The expiration dates of collective bargaining agreements and any minimum funding arrangements
4.  The most recent funded status of the plan

Preparing for the Change:
If you are a union contractor that participates in at least one multiemployer pension plan, you will want to prepare in advance in order to comply with the new standards, and Bergan Paulsen can help you with that transition.  Your plan administrator will need to provide the required disclosure information, and it may take time to make this information available. With a little planning, we hope to make this change as smooth as possible.

Form 1099-PATR Explained

Cooperatives issue Form 1099 PATR to those taxpayers that received money from the cooperative.  Taxpayers will receive these forms in January 2013 to report calendar year 2012 information to its patrons.  This form has a lot of information on it that affects an individual’s farm tax schedule, so it’s important that those receiving these forms from the cooperative understand these various elements.  You can find the updated form here:  http://www.irs.gov/pub/irs-pdf/f1099ptr.pdf. 

Boxes for taxpayer name and identification numbers: It is important that the cooperative and patron recipient have identification numbers aligned with the entity who actually received the distribution. 

Original, void or corrected Form 1099-PATRs:  The IRS will match all cooperative distributions reported on box 1 and 3 to the recipient’s tax returns.  If members are not flagged appropriately by the cooperative, and the form was issued to the party who did not receive the distribution, then voided and corrected forms should be issued. The issuer will check the "void" or "corrected" box at the top of the 1099 form if applicable.

Box 1 – Patronage Dividends:  Lists the patronage dividends paid to the recipient in cash, qualified written notices of allocation (at stated dollar value) or other property.

Cooperatives generally issue "qualified written notices of allocation" to their members in the form of equity in the cooperative.  At least 20% of the patronage dividend or payment must be in cash to be a "qualified written notice of allocation." In this case, if the source of the patronage dividend was derived from an expenditure deducted on your tax return, then the entire amount both cash and noncash portions of the patronage dividend must be reported as income on your tax return.  If related to farming expenditures, then report the patronage dividend on Schedule F as cooperative distributions. The noncash portion represents the amount of qualified patronage dividends which have been reported as income for tax purposes, but which have been retained by the cooperative for its use. At some future time, you may be able to receive additional cash redemptions. The cash received at the later date will not be taxable, because you have already reported the amounts on previous tax returns.

Box 2 – Non-patronage Distributions:  Shows the non-patronage distributions paid to the recipient in cash, qualified written notices of allocation or other property.

Box 3 – Per-Unit Retain Allocations:  A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. These allocations can be paid in money, other property, or qualified certificates.  Per-unit retain allocations issued by a cooperative generally receive the same tax treatment as patronage dividends and are reported on Schedule F as cooperative distributions.

Per-unit retain allocations paid in money (PURPIMs) include amounts paid to patrons for grain. The amount reported on Form 1099-PATR box 3 is the recipient’s calendar year 2012 gross grain sales (rather than net grain sales) to the cooperative.  Members should reclassify grain sales as PURPIMs on the farm income tax schedule.  Generally, the items that differ from net grain sales to gross grain sales include deductions from grain checks for storage, drying, trucking and check-off expenses.   Remember that even if the cooperative has a fiscal year, the cooperative will report these payments to members for their grain purchases paid during calendar year 2012 on Form 1099-PATR box 3.

Box 4 – Federal Income Tax Withheld: Lists the backup withholdings for the recipient.  If the recipient did not provide the cooperative with a tax ID number, the cooperative must withhold 28% of any distributions.

Box 5 – Redemption of Nonqualified Notices and Per Unit Retain Allocations:  Shows the amount the recipient got when he or she redeemed nonqualified written notices of allocation and nonqualified per-unit retain allocations.   If you receive a non-qualified patronage dividend, the cash received is taxable income.  If you receive a nonqualified notice of allocation, retain the notice in your permanent records, but no tax impact occurs at this time, only when cash is received upon later redemption.

Box 6 – Domestic Production Activities Deduction: Reports the amount of Section 199 Domestic Production Activities Deduction (DPAD) that the cooperative allocated to the recipient during calendar 2012.  The deduction represents the amount the recipient may take based on his or her portion of patronage dividends or per-unit retain allocations attributable to Qualified Production Activities Income (QPAI). 

Your local cooperative computes DPAD for its fiscal year-end based on 9% of QPAI.  Recent IRS rulings allow cooperatives to treat grain purchases from its members as per unit retain allocations paid in money (PURPIMs) for purposes of calculating the DPAD.  This classification means that the cooperative is not required to deduct the PURPIMs when calculating QPAI and therefore DPAD. The cooperative, for its fiscal year, computes the DPAD in accordance with these rules and then elects to pass through the deduction to its members during 2012.  The deduction is based on grain payments made to its members during the applicable payment period (from the beginning to the end of the cooperative’s fiscal year).  The deduction is also limited to 50% of qualified wages paid by cooperative.  The wage limitation does not apply a second time to the amount passed through to the member on its tax return. 

In order for the patron to qualify for the deduction, the cooperative must designate the patron’s portion of the Section 199 deduction in a written notice of allocation of DPAD (required to be mailed to the patron no later than the 15th day of the ninth month following the close of the cooperative’s fiscal year) indicating that the cooperative made an election to pass the DPAD on to its members. The recipient’s allocated DPAD is deductible on Form 8903 line 23 for members with a calendar or fiscal year ending within the date of the written notice.

Boxes 7, 8, 9 and 10 – Various Tax Credits:  These boxes list various tax credits, such as the investment tax credit or work opportunity credit, passed through from the cooperative to the recipient. 

Should you have any questions regarding the information on any tax form and what it means for you and your agribusiness, please contact one of the Bergan Paulsen ag team members for more information.

Summary of American Taxpayer Relief Act

Individual Tax Rates

All the individual marginal tax rates are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).  These changes are considered permanent.

Phaseout of itemized deductions and personal exemptions

The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly. 

The phaseout for itemized deductions reduces total itemized deductions by 3% of excess income over the above threshold amounts.

The personal exemptions phaseout reduces personal exemptions by 2% of the total exemptions for each $2,500 of excess income over the above threshold amounts.

Capital gains and dividends

The 15% capital gain rate is retained except a 20% rate now applies to capital gains and dividends for individuals reaching into the 39.6% bracket mentioned above.  The 0% rate is retained to the extent income falls below the top of the 15% income tax bracket – projected for 2013 to be $72,500 for joint filers and $36,250 for singles.

Alternative minimum tax

The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.

Estate and gift tax

The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases permanently from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act. 

Miscellaneous individual extension provisions

• The American opportunity tax credit for qualified tuition and other expenses of higher education will now run through 2017.
• The following are retroactively patched to 2012 and extended one year through 2013:

·       Deduction for up to $250 for elementary and secondary school teachers

·       Deduction of mortgage insurance premiums as qualified residence interest

·       Deduction for state and local sales taxes paid in lieu of state and local income taxes paid

·       Above-the-line deduction for up to $4,000 of higher-education-related-expenses

·       Exclusion from income for Qualified Charitable Distributions from an IRA to a charity

Business tax extenders

• Extended through 2013 the credit for increasing research and development activities, which expired at the end of 2011
•  Expensing amounts under Sec. 179 are changed to $500,00 for 2012 and 2013 with a $2 million investment limit
• Increased expensing amounts under Sec. 179 are extended through 2013
• The availability of an additional 50% first-year bonus depreciation was extended for one year and now generally applies to property placed in service before January 1, 2014
• The following were extended through 2013, and in some cases modified:

·       The Work Opportunity Tax Credit was extended through 2013

·       15 year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements

·       Temporary exclusion of 100% of gain on certain small business stock

·       Reduction in S corporation recognition period for built-in gains tax

·       For tax years beginning in 2012 and 2013, the S corporation recognition period for built-in gains tax is reduced to 5 years

Energy tax extenders

Extends and in some cases modifies the following energy credits that expired at the end of 2011:

• Credit for energy-efficient existing homes
• Cellulosic biofuel producer credit
• Incentives for biodiesel and renewable diesel
• Credits with respect to facilities producing energy from certain renewable resources
• Credit for energy-efficient new homes
• Alternative fuels excise tax credits

Charitable Contributions: What You Should Know

Are you an organization that receives single contributions of $250 or more?

Are you an organization that provides goods or services to donors who make contributions of more than $75?

Are you a donor who makes contributions to a charity?

Here are eight things every taxpayer needs to know before deducting charitable donations, and additional information for the charities receiving the donations.

1.   Make sure the organization qualifies. Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization or check http://1.usa.gov/QT9bA5.

Approximately 275,000 organizations automatically lost their tax exempt status recently because they did not file required annual reports for three consecutive years, as required by law. Donations made prior to an organization's automatic revocation remain tax-deductible. Going forward, however, organizations that are on the auto-revocation list that do not receive reinstatement are no longer eligible to receive tax deductible contributions.

2.   You must itemize. Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

3.   What you can deduct. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.

4.   When you receive something in return. If your contribution entitles you to receive merchandise, goods, or services in return, you can deduct only the amount that exceeds the fair market value of the benefit received.

If the total amount of the contribution is over $75 and the donor receives goods or services in return, the charitable organization is required to provide a written disclosure informing the donor that only the amount above and beyond the value of goods or services received is deductible and provide the donor with a good faith estimate of the fair market value of the goods and services.

If a religious organization provides only “intangible religious benefits,” the acknowledgement does not need to describe or value those benefits, but it does need to state that “intangible religious benefits” were received.

5.   Recordkeeping. Keep good records of any contribution you make, regardless of the amount. For any cash contribution, you must maintain a record of the contribution, such as a cancelled check, bank or credit card statement, deduction record or a written statement from the charity containing the date and amount of the contribution and the name of the organization.

For charitable contributions made through payroll deductions, the following documents can be used as written communication from the charity: pay stub, Form W-2, other employer-furnished document that shows the amount withheld and paid to the charity, or a pledge card prepared by the charity.

6.   Pledges and payments. Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, you can only deduct $200.

7.   Donations made near the end of the year. Include credit card charges and payments by check in the year you give them to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

8.   Large donations.  When making a charitable donation of cash or property of $250 or more, it is the donor’s responsibility to prove entitlement of a deduction.  This also applies to each single payroll deduction of $250 or more.   The charity should provide a contemporaneous written acknowledgement (CWA) of your donation – either at the time of donation or by using an annual summary to substantiate several single contributions of $250 or more – but in the end, the taxpayer bears the burden of proof.  This documentation – a receipt of sorts – must contain the following pieces of information.

• The name of the organization.
• The amount of cash or a description (not the value) of any property contributed.
• A statement as to whether the donor received any goods or services in return for the donation.
•  A description and estimate of the value of any goods or services provided to the donor.  

Additionally, in order for the CWAs to be considered contemporaneous, the CWA must be submitted to the donor on or before the earlier of the date on which the donor actually files their return for the year of the contribution, or the due date (including extensions) of the return. 

If you make a donation of less than $250 to a charity, you do not need a CWA.   For example, donations of $200 three times during the year would not require a CWA to claim the deduction even though the total contribution to the charity exceeded $250. 

For items valued at $500 or more, you must complete a Form 8283, Noncash Charitable Contributions, and attach the form to your return. If you claim a deduction for a contribution of noncash property worth more than $5,000 for other than publicly-traded securities, you generally must obtain an appraisal and complete Section B of Form 8283 with your return.

A recent Tax Court opinion, Durden v. Commissioner, illustrates the importance of proper substantiation of charitable contributions.  The recent emphasis falls on the CWA meeting all of the requirements and being contemporaneous.  In this case, Mr. and Mrs. Durden donated approximately $22,500 to their church.  While the church acknowledged the contributions, the statement didn’t include any details as to whether any goods or services were provided in return.  They later submitted a second CWA, but this one was deemed not contemporaneous.  Eventually, the court ruled with the IRS in refusing to accept either acknowledgement. 

Obtaining a CWA is the donor’s responsibility, and as illustrated in the example above, it’s also the donor’s responsibility to ensure it meets required criteria.

Note to Charities:

While the burden of proof lies with the taxpayer, it is in the best interest of the charity to provide donors with all the necessary documentation whether they ask for it or not.  We encourage charities to send valid CWAs to donors throughout the year; however, no later than January of the following year.

While we understand that it is generally up to the donor to ensure they receive proper substantiation, we advise nonprofit organizations to understand the requirements.  We believe the knowledge will help to preserve donors’ charitable contribution deductions. 

In the end, it’s important to remember that the responsibility falls on the donor to ensure that they have proper documentation to receive this federal income tax deduction.  If all is done correctly, both donors and organizations supported by the donation benefit from such contributions.