Three Reasons to Blog in 2014

As you consider the 2014 marketing plan for your business or organization, a blog can be an important part of your overall strategy. Why? 

1) Blogging improves the search engine results of your website.

2) Blogging boosts your social media marketing strategy.

3) Blogging gives your business a platform for thought leadership.

For more specific tips, including ideas on content and writing style, read the full post on ReachLocal Blog.  Although the article specifically targets law firms, the ideas are applicable to all businesses.

The Curious Case of Edward Snowden

Although our firm does not typically practice in the area of international law, one of our attorneys recently published a guest blog post with the North Carolina Journal of International Law and Commercial Regulation analyzing the international legal issues raised by the case of Edward Snowden, the whistleblower who leaked classified national security documents earlier this year.

During the summer of 2013, the world was captivated by the story of National Security Agency whistleblower Edward Snowden. Currently living in Moscow on a temporary grant of asylum, Snowden has charged the Obama Administration with two related violations of international law: (1) that it interfered with his right to seek asylum; and (2) that by revoking his passport, it had made him stateless. 

Read the entire blog post courtesy of the North Carolina Journal of International Law and Commercial Regulation.

The Ethics of Cloud Computing

A previous blog post discussed best practices for attorneys and businesses who use “cloud computing” to store information on remote computer servers.

The Ohio State Bar Association’s Professionalism Committee has now issued an informal advisory opinion to give ethical guidance for Ohio attorneys regarding storing client data in the cloud. Although the opinion is designed for attorneys, the general principles are applicable to other businesses as well. In its opinion, the committee advised attorneys to select a proper cloud computing vendor; protect client confidentiality and property; appropriately supervise the vendor; and communicate with the client.

Read the full opinion or an excellent discussion in the association’s Ohio Lawyer magazine.

Telecommuting: A Reasonable Accommodation?

A recent analysis of telecommuting growth and trends found that between 13 and 30 million Americans may be working from home at least one day a week.

Employers may not realize that employees who work remotely may impact the organization's responsibilities under the Americans with Disabilities Act (ADA). According to federal Equal Opportunity Employment Commission guidelines, allowing a disabled employee to work from home may be a reasonable accommodation under the ADA.

The Employment Law Lookout blog has some good tips for employers who need to evaluate these reasonable accommodation requests:

So how does an employer decide whether working from home can be a “workable” accommodation? The answer lies with the essential job functions and their application in practice. 

First, identify the essential functions of the position. The job description is usually a good place to start – but make sure it is accurate. Second, decide whether some or all of those functions can be performed at home.

Detroit's Bankruptcy and Your Charitable Donations

Last month, federal proceedings began to determine whether the city of Detroit is eligible to file for bankruptcy. As part of the city’s process to review its assets, Detroit hired the renowned auction house Christie’s to appraise the priceless works of art by Picasso, Monet, Rembrandt, and others housed at the Detroit Institute of Arts.

This action is controversial because it could lead to an art sale and a potential violation of ethical guidelines prohibiting a museum from deaccessioning – selling art from its collection - for any purpose other than acquiring more art. Institutions who violate these guidelines risk losing accreditation and creating controversy in the art world.

Aside from affecting a museum’s collection, Detroit’s move is also extremely relevant to clients or donors. Clients often donate art to museums to meet their tax or estate planning goals, or simply to improve their community. Detroit’s bankruptcy filing is another warning that it is essential to have a carefully drafted agreement before donating property to a museum.

Most art is donated without strings or explicit constraints on sales, so a clearly written document ensures that the donor’s wishes are known and that the museum will abide by those wishes. For example, agreements may explicitly say that a particular piece may never be sold or may never be sold for operating expenses of the institution.

Attorneys and donors should also inquire about a museum’s deaccessioning policies. Since Detroit’s bankruptcy filing, the DIA has amended its deed of gifts to clearly state that the donated work can only be sold to buy more art. But most institutions are not so clear, relying only on ethical guidelines.

As museums face financial difficulties and courts may be more likely to allow the sale of donated artifacts, traditional ethical guidelines may no longer be enough to prohibit a sale. Attorneys and donors would be wise to seek additional protections.

New Markets Tax Credit Set to Expire

An important tax incentive for investments in economically distressed neighborhoods is set to expire at the end of 2013.

The New Markets Tax Credit (NMTC) is designed to increase the flow of capital and spur investment and job creation in communities with high unemployment and other measures of economic distress. The NMTC provides private investors with a 39 percent federal tax credit for investments made in businesses or economic development projects in some of the most distressed communities in the nation.

Since 2003, NMTC investments have directly created over 350,000 jobs -- including more than 40,000 in Ohio – and leveraged $55 billion in capital investment to credit-starved businesses in communities with high poverty and unemployment rates. In Columbus, for example, the NMTC helped investors purchase land and construct a grocery store in a distressed neighborhood.

Legislation sponsored by Sens. Jay Rockefeller (D-WV) and Roy Blunt (R-MO) is currently pending in Congress to make the NMTC permanent. S. 1133, The New Markets Tax Credit Act of 2013, would extend the Credit indefinitely by making it a permanent part of the Internal Revenue Code, and enhance the potential impact of the Credit by increasing the annual NMTC allocation. However, Congress must pass the legislation before the end of the year in order for the NMTC to continue.

Learn more about the credit or congressional efforts to extend it.

Comprehensive Tax Reform Unlikely Before 2015

Experts at this week’s American Institute of Certified Public Accountants National Tax Conference predicted that Congress is unlikely to pass comprehensive tax reform legislation in the near future despite ongoing positive discussions.

The House and Senate tax-writing committees are on track to produce bipartisan tax reform legislation that will receive lawmakers’ approval, but it is unlikely to occur until the next Congress, said tax experts on November 4. Speaking at the AICPA National Tax Conference, Donald R. Longano, former Democratic chief tax counsel to the House Ways and Means Committee, said tax reform is “more likely to come to fruition in 2015,” despite the intense activity going on behind the scenes. 

Observers also predicted that lawmakers would not extend $64 billion in energy and business tax provisions scheduled to expire at the end of 2013.

Any proposals not enacted into law by the end of 2014 would have to be reintroduced in the 114th Congress in January 2015.

Read the full report from the CCH Group Blog.

Franchise Agreements, Part 2

In addition to carefully reviewing a franchise agreement, a potential franchisee has much more information to examine before purchasing a franchise.

Federal law requires that a franchisor provide detailed written disclosures to a potential franchisee. These disclosures include information on franchise fees, obligations of the franchisee, and more.

Ohio law also governs franchise relationships. In 2013, the Ohio legislature updated the Business Opportunity Purchasers Protection Act, which regulates many franchise agreements in the state. Similar to the federal rule, Ohio also requires detailed disclosures to the franchisee. Ohio also allows franchisees to sue the franchisor for damages or a rescission of the agreement, along with other opportunities for relief.

The Federal Trade Commission, Ohio State Bar Association, and Attorney General Mike Dewine have more answers for potential franchisees.

Franchise Agreements, Part 1

According to the International Franchise Association, more than 700,000 Ohio jobs are directly or indirectly related to franchised businesses.  When our clients consider whether to launch or expand a franchise, our attorneys carefully review these and other provisions in franchise agreements:

1. Does the franchise agreement necessitate revisions to your operating agreement? For example, it may require your limited liability company to have a certain number of officers or restrict the type of name.
2. What initial fees are required? What recurring royalty fees will have to be paid?
3. Typically, the agreement will require that the franchisee carry a minimum level of liability insurance. Does your LLC carry this amount of coverage? 
4. Franchise agreements frequently include noncompete clauses to discourage franchisees from operating a similar business nearby. For example, the contract might prevent a coffee franchisee from operating another coffeehouse within the same city during the term of the agreement and for 2 years thereafter. Are these time and geographic restrictions reasonable? 
5. Which employees are bound by confidentiality or nondisclosure agreements? 
6. When can the agreement be terminated? And if the agreement is breached, what are the required damages? 

Although this list is not exhaustive, it may give you an idea of some important questions to consider before finalizing a franchise agreement.

Lawsuit Abuse Reduction Act Proceeds Through Congress

Legislation designed to help small businesses by reducing frivolous lawsuits in federal courts is making its way through the U.S. House of Representatives.

H.R. 2655, the Lawsuit Abuse Reduction Act of 2013 amends Rule 11 of the Federal Rules of Civil Procedure to strengthen sanctions against parties and lawyers who file unmerited lawsuits. Specifically, the bill:

• Reinstates sanctions for the violation of Rule 11;
• Requires judges to impose monetary sanctions against lawyers who file frivolous lawsuits, including the attorney's fees and costs incurred by the victim of the frivolous lawsuit; and 
• Prevents parties and their attorneys from withdrawing frivolous claims after a motion for sanctions has been served.

Bill sponsors hope that the increased sanctions would discourage frivolous suits and claims, allowing business owners to use resources to expand their business rather than defending lawsuits in federal court. Moore & Van Allen’s Litigation Blog has a detailed explanation of the changes to Rule 11, which could affect all attorneys and parties in federal court.

The bill was recently passed by the House Judiciary Committee and is now pending before the full House. A companion bill, S. 1288, is under consideration by the Senate Judiciary Committee.

Choice of Law Provisions in Non-Compete Agreements.

A recent federal case in Ohio emphasizes the importance of examining choice of law provisions in your non-compete agreements.  

From the Ohio Employer's Law Blog:

Choice of law is one of the most important, and, often, most ignored decisions you can making in drafting a non-competition agreement. Lifestyle Improvement Centers, LLC v. East Bay Health, LLC (S.D. Ohio 10/7/13), illustrates how the choice of which state’s law will govern the contact can govern the enforceability of the restrictive covenant. 

Forfeiture of Mineral Leases

When a landowner performs a title search on his property, he or she may discover that someone else has leased the oil or gas rights on the property, even though the landowner has never received royalties or even seen any drilling equipment. Under Ohio law, an owner or lessor cannot lease the property if another person or company holds an existing mineral lease, even if the conditions in that lease have not been fulfilled. Ohio Revised Code § 5301.332 provides the statutory procedure for forfeiting a mineral lease if the lessee has not kept specific covenants in the lease.

First, after the lease is discovered, further research must be done to determine the current lessee. Particularly in the case of old leases, the original lessee may have transferred the lease to another person or company.

Once the current lessee is identified, Ohio law requires that the lessor notify the lessee in writing that the lease has been forfeited, describing the specific ways that the lease has been violated. This requires careful examination of the lease document. For example, a lease may state that it remains in effect as long as oil or gas is produced from the land; or as long as lessor is paid royalties.

After thirty days of providing notice, the lessor can file an affidavit of forfeiture with the county recorder’s office reciting, among other things, the failures to abide by the lease. In response to this notice of forfeiture, the current lessee may release the lease or respond with an affidavit detailing why the lease may still be in effect. If there is no response within sixty days, the lease can be canceled by the county recorder.

This process is similar to the procedure under the Ohio Dormant Mineral Act, discussed in a previous blog post, which allows a property owner to claim another individual’s abandoned rights to the minerals located beneath the landowner’s property.

Cloud Computing for Attorneys and Businesses

Like many businesses, our law practice is gradually becoming paperless. Services like Dropbox or iCloud which use “cloud computing” – saving files on remote servers rather than on local machines – can greatly improve both communication and collaboration while reducing the cost of supplies and waste.

Whether information is stored on a cloud or in a file cabinet, attorneys are required by professional conduct rules to make reasonable efforts to prevent the unauthorized disclosure of client information. Some states have already issued specific ethics opinions regarding cloud computing for lawyers.

While these legal ethics rules and opinions might not specifically apply to other professions, the general principle of keeping information confidential is relevant to both attorneys and business owners.

To maximize the potential of Dropbox or similar services while maintaining the privacy of your information, consider implementing these recommendations from a variety of legal blogs:

• Protect your information before sharing it with the cloud. (via Flat Fee IP)
• “Lawyers should take the additional step of encrypting, or pre-encrypting, client data before we give it to Dropbox or any other cloud-based storage solution.
• Use a two-step authentication when logging in. (via Attorney at Work)
• “Two-factor authentication increases login security because it requires you to use something more than just your login credentials (your account name and password).”
• Share files with caution. (via Small Firm Innovation)
• “In order to avoid sharing other client information with [your client], you should create a separate folder that contains only the documents you want to share with them.”
• Unshare files with clients or co-counsel when the case is resolved. (via Lawyerist)
• “Dropbox makes it very easy to share files with co-counsel. It’s also easy to forget to kick out your co-counsel when the case is over."

Supreme Court Strengthens Property Rights

Although today's start of the Supreme Court's new term brings prediction after prediction about the important cases on the docket, it can be difficult to forecast the impact of the Court's decisions.  For property owners, for example, the June 25 decision in Koontz vs. St. Johns River Water Management District could have just as far-reaching an effect as the more high-profile cases involving the Voting Rights Act or Defense of Marriage Act.

This case began in 1994, when Coy Koontz, a Florida landowner, applied for a permit to develop a portion of his property. Because his land was designated as wetlands under Florida law, Koontz was required to enhance wetlands elsewhere as part of his application. He proposed to develop 3.7 acres and give his remaining 11 acres to the district for conservation.   

The permitting agency, the St. Johns River Water Management District, refused to approve Koontz’s construction unless he met one of two conditions: 1) reduce the size of his development to 1 acre and reserve the remaining 14 acres for conservation; or 2) continue with his existing proposal and pay for conservation improvements on district-owned wetlands elsewhere. 

When Koontz sued, the courts were forced to interpret the case based on previous Supreme Court decisions which allowed government to condition land permits only if there was a “nexus” and “rough proportionality” between its demand and the effect of the land use. In Koontz, the Supreme Court ruled that these requirements still applied, even though Koontz’s permit was denied (not approved with conditions) and even though his land was not taken (and only financial demands were made). “We hold that the government’s demand for property from a land-use permit applicant must satisfy the requirements of Nollan and Dolan even when the government denies the permit and even when its demand is for money.” (Koontz at 22). 

This broad reading of the Constitution’s Fifth Amendment Takings Clause, which seemingly requires government to show a connection between its land requirements and its financial demands, promises to strengthen the rights of property owners and developers while placing additional burdens on local governments. Potentially, every governmental financial demand may be constitutionally challenged by property developers, and much litigation is likely to result as future courts grapple with the ramifications of the Koontz decision.

Legislature Examines Debt Settlement Regulations

Ohioans seeking to settle their credit card debt could be affected by a pending bill in the Ohio Legislature. House Bill 173, currently pending before the House Financial Institutions, Housing and Urban Development Committee would change existing regulations governing debt settlement companies.

Debt settlement companies are third parties who intervene between a debtor and creditor, offering to settle creditor debts for a small percentage of the amount owed. In a typical case, the debtor stops paying the creditor and instead makes regular payments to the debt settlement company, who then attempts to negotiate a settlement on behalf of the debtor.

Currently, these companies are regulated under a 2004 statute known as the Debt Adjuster’s Act (Ohio Revised Code § 4710.01 et. seq.), which, among other provisions, limits fees charged by debt settlement companies to the greater of 8.5% of the debtor’s monthly payments or $30. Additionally, the Federal Trade Commission finalized rules in 2010 prohibiting companies from charging fees before debts are settled.

House Bill 173 would create separate regulations for debt settlement companies. Under the bill, these companies would be exempted from the requirements and fee caps of ORC 4710.02 and – as in the 2010 FTC rules – prohibited from charging up-front fees to debtors. Fees would no longer be capped, but companies would be subject to additional regulations, including registering with the Department of Commerce and disclosing a variety of information to debtors.

The Columbus Dispatch recently published an article summarizing opposing views on the bill, and the Ohio Legislative Service Commission has a full analysis of the legislation.

Ohio Supreme Court Limits Class Action Suits

The Ohio Supreme Court in Stammco, L.L.C., v. United Tel. Co. of Ohio has rejected a proposed class action lawsuit against a telephone company and in doing so, tightened restrictions on class action lawsuits.  The Ohio Employer Law Blog has a good summary of the decision and its implications for Ohio employers:

“Stamcco is a huge victory for Ohio businesses. It is now that much harder to establish a class action, confirming that Ohio’s class-action rules fall in line with their federal counterparts.”

The Ohio Dormant Mineral Act

Increasing oil and gas discoveries in Ohio has led more and more property owners to search for profitable minerals on their land. However, surface landowners are often surprised to learn that they cannot drill on their property because another individual or entity owns the rights to the gas, oil, coal, or other minerals beneath the surface. Even though the property is undeveloped, the surface property owner cannot extract the minerals from the land – or lease the drilling rights – unless he or she also holds the underground rights.

The Ohio Dormant Mineral Act provides specific procedures for property owners to claim another landowner’s mineral rights to these undeveloped underground resources.

If you are a surface owner seeking to obtain rights in sub-surface resources, you are required to: 1) notify the mineral rights holder of your intent to declare his or her interest abandoned, and 2) 30 to 60 days later, file an affidavit of abandonment with the county recorder’s office. If the mineral rights owner does not act, the law considers his or her rights abandoned, and you will take possession of the underground mineral interest.

If you are the mineral rights owner, you have two options to preserve the interest. You can: 1) file a claim with the county recorder to preserve the interest, or 2) file an affidavit that identifies one of several specific events (such as the production of minerals or a title transaction) that has occurred on the land within the previous 20 years. These actions demonstrate to the property owner that the mineral rights have not been abandoned.

Regardless of whether you own the surface rights or the mineral rights, following the proper procedural steps are essential to preserving your rights, and it is advisable to consult an attorney before proceeding.

Indemnification in Property Management Agreements

An important part of a management agreement between property owners and property managers is the indemnification clause, in which the owner protects the manager from certain types of liabilities. In the sample clause below, the owner indemnifies the manager against all claims except for five specific exclusions:

Owner shall indemnify and hold harmless Manager against any and all claims made against Manager arising out of the management, ownership, leasing, supervision or operation of the Property by Manager, except for claims arising from or related to (i) the gross negligence of Manager or its officers, agents, or employees; (ii) wrongful willful acts of Managers or its officers, agents or employees; (iii) acts or omissions of Manager or its officers, agents or employees which are outside of the scope of authority established by this Agreement or which are in breach of the obligations of Manager under this Agreement; (iv) misapplication of funds by Manager, its officers, agents or employees; or (v) fraud of Manager, its officers, agents or employees.

However, if the manager allegedly violates the Fair Housing Act, both the owner and manager may be sued by the aggrieved renter. While such actions may be considered gross negligence under the contract, it is wise to explicitly include a clause in the agreement of this type: “Manager will manage the property in full compliance with the requirements of the Fair Housing Act, and Manager is authorized to take those steps deemed appropriate to effectuate the purposes of the Act.”

Since Ohio courts look to the plain language of indemnification clauses (see Stambaugh v. T.C. Wood Realty, Inc., 2010-Ohio-3763 (Ohio Ct. App. 2010)), it is important for property owners to consult an attorney to ensure that they are properly protected by the management agreement.

Individuals Limited by S Corporation Loss Limitation But Not Passive Loss Limitation

Interesting tax update from the CCH blog:

Individuals Limited by S Corporation Loss Limitation But Not Passive Loss Limitation; Testimony Established Wife Materially Participated; Late-Filing Penalty Applied (Montgomery, TCM)

An individual materially participated in the activities of a limited liability company (LLC) that she and her husband started and for which both taxpayers performed services. Therefore, her claimed share of a net operating loss (NOL) was not precluded on the ground that she was engaged in a passive activity. However, the taxpayers’ claimed loss from their S corporation was limited and their guarantee of a debt owed by that company did not affect that limitation. They were also subject to an addition to tax for the late filing of their return.

The wife participated in the LLC for more than 500 hours during the year at issue, and her participation was regular, continuous, and substantial. Although only the wife was a member of the LLC, the activities of her husband were also taken into account to determine participation. Daily time reports and other logs were not required to establish participation because the taxpayers testified credibly as to their activities in founding the company, negotiating contracts, hiring employees and conducting daily business. As a result, the wife’s share of the construction company’s loss was not a passive loss under Code Sec. 469 and the taxpayers were entitled to claim the NOL.

Read the entire post here.

Reasonable Accommodations and Live-In Aides

The Fair Housing Act requires landlords to make "reasonable accommodations" in their rules, policies, practices, or services, when such accommodations may be necessary to afford a disabled tenant or prospective tenant equal opportunity to use and enjoy a dwelling. The tenant may make the request at the time the tenant first rents or after the tenancy has begun.

One common reasonable accommodation request occurs when a disabled tenant asks a landlord to allow a permanent live-in aide to live in his or her unit and assist with daily activities such as cooking, bathing, or administering medicine. This request can be evaluated on a case-by-case basis by asking some of the following questions:

• Is this request reasonable? It might be if the unit can accommodate an additional person living there without creating a safety risk. It might not be if the proposed live-in aide does not meet the landlord's tenant selection criteria or violates provisions in the resident's lease.
• Is the live-in aide necessary? The tenant’s disability and related need for a live-in aide should be well-documented. Landlords may also determine if the requested live-in aide is qualified, was not part of the tenant's household, and is legitimately there to serve as an aide.
• Will accommodating the request provide the tenant equal opportunity to use or enjoy the property? This language addresses the extent of the accommodation; permitting the live-in aide must allow the tenant to use the property as equally as other tenants - not more or less.

Landlords should be prepared for a tenant to request a live-in aide and should train their staff to evaluate and respond to the request. Failing to respond correctly can expose the landlord to a lawsuit under the Fair Housing Act.

Fair Housing Act: Reasonable Accommodations

The federal Fair Housing Act outlaws discrimination in housing, including discrimination based on disability.  The law prohibits housing providers from discriminating against 1) a disabled buyer or renter; 2) a prospective disabled buyer or renter; or 3) a disabled person associated with that buyer or renter. 42 USC § 3604(f)1.

The law also requires housing providers to “make reasonable accommodations in rules, policies, practices, or services, when such accommodations may be necessary to afford such person equal opportunity to use and enjoy a dwelling.” 42 USC § 3604(f)3(b).  For example, a landlord that does not permit pets must allow a blind tenant to have a guide dog, and an apartment complex with unassigned parking places must reserve a spot close to the building for a tenant who cannot walk.  These  accommodations are necessary to provide a disabled individual an equal opportunity to use and enjoy the dwelling.  However, housing providers can deny the accommodation request if the request is not reasonable – for instance if it causes an undue financial or administrative burden or fundamentally alters the provider’s operations.

Property managers should have an established process for evaluating reasonable accommodation requests, including a reasonable accommodation request form for tenants that can be distributed with the lease and other documents given to the tenant.  If a request is determined to be unreasonable, the landlord should explain the decision in writing and offer to discuss alternative accommodations.

For answers to more frequently asked questions about the Fair Housing Act, visit http://www.hud.gov/offices/fheo/library/huddojstatement.pdf.

Summary Of The American Taxpayer Relief Act Of 2012

Late in 2012, “fiscal cliff” was the political and economic term du jour in the United States. In short, the fiscal cliff was a combination of spending cuts and tax increases that were scheduled to automatically occur on January 1, 2013 (and in fact did occur). Many believed that such a sharp decline in the budget deficit would result in another recession. Congress and the President scrambled to reach a “deal” that combined tax relief with spending reform. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the “Act”), passed merely hours prior by the Senate and House of Representatives. The Act provides for many tax law changes but very little government spending reform. Congress and the President are expected to reform government spending at a later date.


This memorandum shall serve to summarize the tax provisions of the Act that we believe are most important to our clients, both as individual taxpayers and as small business owners. Please note that many of the tax provisions in the Act are “permanent.” A provision described below as “permanent” does not mean that Congress cannot or will not amend such provision, but rather that such provision has no set expiration date. This memorandum is not intended to provide tax or business planning advice. We would not presume to give planning advice without speaking directly with you and learning all facts relevant to you or your business.

INDIVIDUAL PROVISIONS

Individual Income Tax Rates

• Bush-era income tax rates are permanent for 2013 and beyond, except that taxpayers with taxable income above $400,000 ($450,000 for married taxpayers and $425,000 for heads of households) will be taxed at a 39.6% rate.
• The other marginal rates for 2013 and beyond are 10, 15, 25, 28, 33, and 35 percent.
• The 35% marginal rate applies to incomes between the top of the 33% rate (projected to be $398,350, or $199,175 for married taxpayers filing separately) and the $400,000/$450,000 threshold at which the 39.6% rate bracket now begins.
• The 35% income bracket ranges for 2013, therefore, are:
• $398,350 - $400,000 for single filers.
• $398,350 - $425,000 for heads of household.
• $398,350 - $450,000 for joint filers and surviving spouses.
• $199,175- $225,000 for married taxpayers filing separately.
• The $400,000/$450,000 threshold amounts are bottom-line taxable income, rather than adjusted gross income, as had been proposed by President Obama in the “fiscal cliff” negotiations.

As you can see, anyone with taxable income less than the $400,000/$450,000 thresholds will not see their income tax rates rise in 2013. Furthermore, those earning $200,000 ($250,000 for married taxpayers filing jointly) will remain in the 33% marginal bracket. This is important because there was a strong push to impose the top 39.6% rate on incomes above the $200,000/$250,000 threshold.

Capital Gains and Dividends

• The top rate for long-term capital gains and dividends is 20% (up from 15% in 2012).
• The top rate applies to the extent that a taxpayer’s income exceeds the $400,000/$450,000 thresholds.
• All other taxpayers will pay a maximum rate of 15% on long-term capital gains and dividends.
• Taxpayers that fall below the 15% marginal income tax bracket will pay no tax on long-term capital gains and dividends.
• Short-term capital gains will continue to be taxed at individual income rates. Short-term capital gain means gain realized on the sale or disposition of capital assets held for less than one year.
• Certain dividends do not qualify for the reduced tax rates and will continue to be taxed as ordinary income. Those include dividends paid by credit unions, mutual insurance companies, and farmers’ cooperatives (not an exhaustive list).

Absent any changes, the maximum rate for all capital gain would have been 20% in 2013 and beyond, expect for those below the 15% marginal tax bracket threshold. Therefore, taxpayers not in the top marginal income tax bracket will continue to enjoy a 15% tax on long-term capital gains and dividends.

Please also note that the Patient Protection and Affordable Care Act (“Obamacare”) imposes an additional 3.8% tax on Net Investment Income for individuals with taxable incomes above $200,000 ($250,000 for married taxpayers filing jointly and surviving spouses, and $125,000 for married taxpayers filing separately). This surtax applies to both short- and long-term capital gains and dividends, as well other types of investment income. Therefore, a taxpayer in the top marginal income tax bracket will pay 23.8% tax on long-term capital gains and dividends and 43.4% on short-term capital gains starting in 2013.

Alternative Minimum Tax (“AMT”)

• The AMT for 2012 has been “patched,” meaning the exemption amounts have been increased and nonrefundable personal credits to the full amount of an individual’s regular tax and AMT are allowed for tax year 2012.
• The new 2012 exemption amounts are as follows:
• $50,600 for unmarried individuals.
• $78,750 for married taxpayers filing jointly and surviving spouses.
• $39,375 for married individuals filing separately.
• The 2013 exemption amounts are expected to be approximately $1,000 - $2,000 higher for each above filing status.

Without the AMT “patch,” the exemption amounts would have been $33,750 for unmarried individuals, $45,000 for married taxpayers filing jointly and surviving spouses, and $22,500 for married individuals filing separately. Therefore, the “patch” greatly increases the exemption amounts and saves over 60 million taxpayers from being subject to the AMT for tax year 2012.

Although this patch is permanent, the future of the AMT remains uncertain. Some lawmakers have proposed that the AMT be abolished altogether. President Obama has proposed replacing the AMT with the so-called “Buffett Rule” which would, generally, ensure that taxpayers earning over $1 million annually would pay an effective tax rate of at least 30%. The Buffett Rule was included in the Paying a Fair Share Act, a bill rejected by the Senate in 2012. It is unclear if the Buffett Rule will be re-proposed in future legislation.

Pease Limitation

• The Act revives the “Pease” limitation on itemized deductions.
• The applicable threshold levels are as follows:
• $300,000 for married taxpayers and surviving spouses.
• $275,000 for heads of households.
• $250,000 for unmarried taxpayers.
• $150,000 for married taxpayers filing separately.

The “Pease” limitation is a limit on itemized deductions for higher income taxpayers. It was suspended in 2001 and again in 2010. The limitation reduces the taxpayer’s otherwise allowable itemized deductions by 3% of the amount by which the taxpayer’s adjusted gross income exceeds the applicable threshold. However, the amount of itemized deductions may not be reduced by more than 80%. Certain itemized deductions, such as medical expenses, investment interest, and casualty, theft or wagering losses, are excluded. Though the limitation has been revived, the applicable threshold amounts are much higher than they were before they suspended.

Personal Exemption Phase-out

• The Act revives the personal exemption phase-out rules.
• The new applicable threshold levels are as follows:
• $300,000 for married taxpayers and surviving spouses.
• $275,000 for heads of households.
• $250,000 for unmarried taxpayers.
• $150,000 for married taxpayers filing separately.

Under the phase-out, the total amount of exemptions that may be claimed by a taxpayer is reduced by 2% for $2,500, or portion thereof (2% for each $1,250 for married taxpayers filing separately) by which the taxpayer’s adjusted gross income exceeds the applicable threshold level.

Federal Estate, Gift, and Generation-Skipping Transfer (“GST”) Taxes

• The maximum federal estate tax rate is 40% with a $5 million annually inflation-adjusted exclusion for estates of decedents dying after December 31, 2012. The rate and exclusion are permanent.
• “Portability” between spouses is permanent. Portability allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent’s unused exclusion to the surviving spouse’s own transfers during life and at death.
• The Act extends the deduction for state estate taxes.
• There is imposed a 40% tax rate and a unified estate and gift tax exemption of $5 million for gifts made after December 31, 2012.
• The Act extends numerous GST tax-related provisions that were scheduled to expire after December 31, 2012. Those provisions include the GST deemed allocation and retroactive allocation provisions, provisions allowing for a qualified severance of a trust for purposes of the GST tax, and relief from late GST allocations and elections.

The maximum estate tax rate of decedents dying after December 31, 2010 and before January 1, 2013 was 35% with a $5 million exclusion. Absent the changes enacted by the Act, the maximum rate would have been 55% with a $1 million exclusion for 2013 and beyond. The maximum gift tax rate was 35% with a $5 million exclusion for gifts made in 2011 and 2012.

Other Important Individual Tax Provisions

• The Act extends through 2013 the election to claim an itemized deduction for state and local general sales taxes in lieu of state and local income taxes.
• The Act permanently extends the $1,000 child tax credit. The credit was scheduled to revert to $500 per qualifying child after December 31, 2012.
• The Act extends the adoption credit and the income exclusion for employer-paid or reimbursed adoption expenses up to $10,000.
• The Act extends enhancements to the child and dependent care credit. The current 35% credit rate is made permanent along with the $3,000 cap on expenses for one qualifying individual and the $6,000 cap on expenses for two or more qualifying individuals.
• The Act extends through 2017 the American Opportunity Tax Credit (the “AOTC”). This credit gives qualified individuals a tax credit of 100% of the first $2,000 of qualified tuition and related expenses and 25% of the next $2,000, for a maximum credit of $2,500 per eligible student. The AOTC applies to the first four years of a student’s post- secondary education.
• The Act extends until December 31, 2013 the above-the-line deduction for qualified tuition and related expenses. This extension applies retroactively to 2012. This deduction and the AOTC cannot both be taken in the same year.
• The Act permanently repeals the 60-month rule for the $2,500 above-the-line student loan interest deduction. The 60-month rule limited the deduction for student loan interest to 60 months. In addition, the Act permanently repeals the restriction that makes voluntary payments of interest nondeductible.
• The Act reinstates the provision that treats mortgage insurance premiums as deductible interest that is qualified residence interest. This provision previously expired in 2011.

BUSINESS TAX PROVISIONS

Internal Revenue Code Section 179 Small Business Expensing

• The Act extends through 2013 the enhanced Internal Revenue Code Section 179 small business expensing.
• The Section 179 dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit.

Without the Act, the Section 179 dollar limit for tax years beginning in 2012 would have been $125,000 with a $500,000 investment limit. In tax years after 2012, the dollar limit would have been $25,000 with a $200,000 investment limit. Unless Congress further acts, the $25,000/$200,000 limits will apply to tax years beginning in 2014.

Bonus Depreciation

• The Act extends 50% bonus depreciation through 2013.

To be eligible for bonus depreciation, qualified property must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. The qualified property must be new and placed in service before January 1, 2014 (January 1, 2015 for certain longer production period property and certain transportation property).

Subject to the investment limitations, Section 179 expensing remains a viable alternative, especially for small business because property qualifying under Section 179 expensing can be used or new.

Work Opportunity Tax Credit

• The Act extends through 2013 the Work Opportunity Tax Credit (“WOTC”), which rewards employers that hire individuals from targeted groups with a tax credit.

An individual from a “targeted group” is generally a “hard-to-employ” worker. But the Act also extends the WOTC for employers hiring qualified veterans. The credit is equal to 40% of first-year wages up to $6,000. The WOTC is part of the general business credit.

Qualified Leasehold/Retail Improvements and Restaurant Property

• The Act extends through 2013 the 15-year recovery period for qualified leasehold improvements, qualified retail improvements, and qualified restaurant property.

Reduction in S Corporation Recognition Period for Built in Gains

• For tax years beginning in 2012 and 2013, the recognition period for purposes of S corporations with built-in gains shall be 5 years.

When a corporation converts to an S corporation and then sells assets, any built-in gains in those assets will be taxed at the corporate tax rate (currently, 35%). Built-in gains are those gains that would exist if assets were sold upon conversion from a C corporation to an S corporation. The built-in gain amount is locked-in at the time of conversion. The Internal Revenue Code contains a rule that states that an S corporation that sells assets after conversion from a C corporation must pay the corporate tax on those built-in gains upon sale of such assets. Thus, a sale of assets with built-in gains by an S corporation could result in double taxation- the built-in gain is taxed at the 35% corporate rate and then any amount passed through to shareholders will be taxed at the shareholder’s personal rate. This rule, however, does not apply forever. Under previous law, the corporate tax liability is reduced by 10% per year that an asset remains unsold and any assets with built-in gain sold after 10 years will no longer be subject to the corporate tax. The Act replaces the 10 year recognition period with a 5 year recognition period for tax years beginning in 2012 or 2013. Therefore, if you have a company that started as a C corporation but you elected S corporation status in 2007, then by 2013 any built-in gains of the company’s assets sold in 2013 will not be taxed at corporate rate. This presents a great opportunity for S corporations that were converted from C corporations 5 or more years ago that wish to sell assets but have been hindered by the 10 year recognition period.

Please do not hesitate to call us with any questions about the American Taxpayer Relief Act of 2012 or to discuss any potential planning opportunities or concerns that may have arisen as a result of this Act.