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IRS Issues Proposed Regs on 3.8% Medicare Surtax

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December 4th, 2012

The IRS issued proposed Regulations on the 3.8% Medicare Surtax imposed on investment income.  Tony Nitti, a columnist for Forbes Magazine has a very good initial take on these proposed regulations.  I would suggest reading the column to get a good idea of the major issues involved, but I am going to recap the major ones pertaining to most farmers:

  1. The IRS contends in almost all cases that rents, whether a grouping election has been made or not, are subject to the Medicare surtax.  This means that if you cash rent your farm to an S corporation, then all of the rent income is subject to the potential surtax.  We disagree with this contention and will forward our comments to the IRS, but it may be hard to change their mind.
  2. Items of deductions related to investment income such as (1) state income taxes, (2) investment interest, and (3) investment management and other investment expenses may be used to reduce net investment income subject to the tax.  This can be a fairly complicated calculation and will add time and effort to the preparation of an income tax return.
  3. Charitable Remainder Trusts (CRT) now have an additional layer of income type to calculate.  In addition to the normal “four” buckets of income to be allocated to the beneficiaries, the trust will now need to determine how much of these income items are investment and non-investment income and it is “surprising” that the IRS will want the investment income distributed first (so you can pay the tax quicker).
  4. One possible benefit is that the IRS will allow you to have a “do-over” election on any grouping election.  This do-over will occur in the first year that the surtax might apply to you.
  5. If you have any installment sales that occur  in 2012 or before, you will need to carefully review the Regulations since you may need to make an election to prevent business gains from being subject to the investment sur-tax beginning in 2013 and beyond.

There  are many other proposed items in the Regulations and we will keep you posted in the next few weeks, but since the law will start applying in less than a month, we wanted to get this quick synopis to you now.

These are proposed regulations and subject to public comment.  However, based on history, major changes to the IRS position can be somewhere between slim and none. 

Paul Neiffer, CPA

Paul Neiffer

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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