Presenting a 110-Minute Encore Presentation of the Webinar with Live, Interactive Q&A Self-Employment Tax and NIIT for LLCs and Higher Income Individuals: Navigating the Complex Interplay WEDNESDAY, FEBRUARY 18, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: James R. Browne, Partner, Strasburger & Price , Dallas Cameron Hess, Sr. Principal, Wagner Kirkman Blaine Klomparens & Youmans , Mather, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.
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Self-Employment Tax and NIIT for LLCs and Higher Income Individuals Feb. 18, 2015 James R. Browne Cameron Hess Strasburger & Price Wagner Kirkman Blaine Klomparens & Youmans jim.browne@strasburger.com chess@wkblaw.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 6
Jim Browne Cameron Hess STRASBURGER & PRICE, LLP WAGNER KIRKMAN BLAINE Dallas, TX KLOMPARENS & YOUMANS LLP 214.651.4420 Mather, CA jim.browne@strasburger.com 916.920-5286 x810 chess@wkblaw.com Feburary 18, 2015
Agenda Introduction Self-employment tax implications for LLC members Treatment of limited partners under 3.8% taxes Planning opportunities Proposals and changes on the horizon 8
Introduction 9
Introduction Supplemental Taxes (before 2013) FICA/SET Employment tax on wages (“ FICA ”) 15.3% on base amount (indexed)*; 2.9% on excess Paid ½ by employer and ½ by employee Tax on earnings from self- employment (“ SET ”) 15.3% on base amount (indexed and adjusted for wages); 2.9% on excess Investment income No supplemental tax *$110,100 for 2012 10
Introduction Supplemental Taxes (current law 2013) FICA/SET/Medicare/NII Employment tax on wages (“ FICA ”) 15.3% on base amount (indexed)*; 2.9% on excess Paid ½ by employer and ½ by employee Additional 0.9% employee tax on excess wages of high-income individuals Tax on earnings from self- employment (“ SET ”) 15.3% on base amount (indexed and adjusted for wage income); 2.9% on excess Additional 0.9% tax on excess self-employment earnings of high-income individuals Investment income 3.8% tax on net investment income of certain high-income taxpayers* *$118,500 for 2014 11
Introduction Application of FICA and SET additional tax Affected (high-income) taxpayers Individuals with wages and/or self-employment income in excess of: $250,000 joint $125,000 separate $200,000 individual and other Additional tax applies only to the aggregate wages and self- employment income in excess of the specified amounts Thresholds are not indexed for inflation Corporations, estates, and trusts are exempt Additional tax is subject to withholding or estimated tax payments along with regular FICA or SET 12
Introduction - NII “basics” Additional Tax – Starting 1/1/2013. Applies to: individuals, estates and trusts and: Sch K-1 entity reporting Compute 3.8% Additional Tax x the lesser of: (1) Total NII (net investment income), or (2) Excess MAGI * *Excess MAGI = “MAGI minus Threshold Amount. (Except US persons overseas, MAGI = AGI – Line 31 Form 1040.) - Total NII is after deduction for portion of Sched A, Form 1040 expenses (investment expenses, alloc. state income taxes) 13
Individuals - Threshold Amount Threshold Status Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household $200,000 Qualifying widow(er) with child $250,000 14
Trusts/Estates - Threshold Am’t 2014: $12,150 - CPI indexed ($12,300-2015) Compare to individuals: 12,150 vs 125K/200K/250K Beneficiary distributions (of DNI) generally reduces the NIIT to trust/estate NII then passes to beneficiary 15
Example 1 – Individual Big John (unmarried, in US) has $300,000 NII (rental income) $190,000 AGI (had a business loss) 3.8% NIIT Computation: NII Tax = $0. 3.8% x lesser of (1) $300K NII or (2) $0.0 * * (190K AGI – 200K Threshold) 16
Example 1a – Irrev. Trust BJ Irrevocable Trust has $300K NII; $190K AGI (business loss) No beneficiary distribution (no DNI Distribution) 3.8% NIIT Computation: NII Tax = $6,758.30. 3.8% x lesser of (1) $300K NII or (2) $177,850 * *(190,000 MAGI – 12,150 Threshold) But, if $177,850 DNI distributed, NII Tax = $0.0 ($12,150 AGI) 17
Introduction Application of NIIT (con’t) Exempt taxpayers: Corps, foreign trusts, and TE or charitable trusts Partnerships and S corporations are not subject to NIIT, but the income of such entities may be subject to NIIT in the hands of the owners Distributions from foreign trusts may be subject to NIIT in the hands of the beneficiary SET overlap : NII excludes income subject to SE tax Estimated tax: NIIT included in calculation of required installments 18
Introduction NII = “ Gross Investment Income (GII) ” less: “Allowable Deductions ” GII Categories: 1. Portfolio Income § 163 – SAME RULES 2. PAL/PIG § 469 – FEW CHANGES 3. Finance/Commodity traders-SAME RULES NOT “day traders”. Reduces value of security/commodity traders tax benefits 4. Net Gain (Dispositions) – LOTS OF CHANGES 19
Allowable Deductions Normal related deductions (e.g., expenses for rentals) “1040 Schedule A” deductions ( phase-outs ) State Income Taxes ( allocate ) Investment Interest Expenses ( related ) Other investment expenses (e.g., advisor fees) ( related ) 20
Introduction Common types of excluded income Interest income on tax exempt bonds Income from qualified retirement plans Social security benefits Alimony Wages and self-employment income 21
Self-employment tax implications for LLC members 22
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