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    New 2014 Sales Tax on Service Contracts

    On July 23, 2013, North Carolina Governor Pat McCrory signed into law House Bill 998, the Tax Simplification and Reduction Act (the Act). This legislation made important changes to the North Carolina tax code and included reforms to the state’s individual income tax, corporate income tax, and sales and use tax. Among numerous significant changes, the Act extends the application of the North Carolina sales tax to sales of service contracts beginning on January 1, 2014.

    • Taxable Service Contract Defined
    • Single Repair Transactions Not Covered by a Service Contract are Exempt
    • Contracts to Maintain, Service, or Repair Real Property or Personal Property Attached to Real Property
    • Sales Tax Applicable to Receipts for Certain Service Contracts Entered Into Prior to January 1, 2014
    • Separately State Sales Tax on Invoice
    • Cancellation or Refund of a Service Contract

    For more information, including exceptions to the new law and a list of exemptions, here is a link to the North Carolina Department of Revenue’s Directive.

    If you would like more details about the new law and how it might impact you, please do not hesitate to call our office at 910.323.3100.

    This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services.  This document does not constitute assurance, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. McFadyen & Sumner, CPAs PA is not responsible for any loss resulting from or relating to reliance on this document by any person.

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    2014 Tax Numbers

    The IRS has announced the annual inflation adjustments for a number of provisions for the year 2014. These numbers and rates are those you will use to prepare your 2014 tax returns in 2015.

    Standard Mileage Rate for the use of an automobile will be 56 cents per mile for business miles driven.

    Social Security taxable wage limit increases from the 2013 limit of $113,700 to $117,000 for 2014. Retirees under full retirement age can earn up to $15,480 without losing benefits.

    401(k) maximum salary deferral remains at $17,500 for 2014. The catch-up limit for 50 and older also remains unchanged at $5,500.

    SIMPLE maximum deferral remains at $12,000 for 2014. The catch-up limit for 50 and older also remains unchanged at $2,500.

    IRA Contribution limit remains at $5,500 for 2014 ($6,500 for 50 and older).

    HSA Contribution limit increases for 2014 to $3,300 for individuals and to $6,550 for families.

    Annual Gift Tax Exclusion remains at $14,000.

    Estate Tax Exemption increases from the 2013 amount of $5,250,000 to $5,340,000 for 2014.

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    Employers Must Collect New Employee’s Withholding Allowance Certificates

    Beginning with your first payroll dated in 2014, employees may notice changes in their paychecks due to updated 2014 federal and state tax laws.

    As a result of a new tax law enacted in North Carolina, every employer must have all employees provide a new Employee’s Withholding Allowance Certificate, either Form NC-4 EZ or Form NC-4. The new form must be completed by the employee and provided to the employer so the correct amount of State income tax is withheld for any payment periods beginning on or after January 1, 2014.

    Failure by your employees to complete this new NC-4 form could result in a reduction in your employees’ net paychecks.

    We anticipate the simpler Form NC-4 EZ will likely suffice for most employees. This form can be used even if employees plan to itemize deductions for their tax filing. Form NC-4 is an extended withholding form that may provide more precise withholding figures, but will require historical tax information and estimation of 2014 income, deductions, and credits from the employee.

    If an employee fails to provide the employer with the applicable updated form(s), the employer is required to withhold North Carolina tax based on the filing status of “single” with no allowances.

    Copies of the forms, as well as instructional materials, are available on the North Carolina Department of Revenue’s website at http://www.dor.state.nc.us/downloads/wh_forms.html. The IRS’ Form W-4 is available at http://www.irs.gov.

    Please call us if you or your employees have any questions concerning the new forms or need assistance completing them.

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    New Tax Law Enacted in NC

    In July, Governor Pat McCroy signed the Tax Simplification and Reduction Act into law, effectively overhauling North Carolina’s state tax code. The new law addresses many topics such as sales tax, income taxation, and tax credits and deductions. As such, it will impact both individual taxpayers (including small business owners) and corporations. Some sections of the Act went into effect immediately after the law was ratified, while others will be phased in over the next 2-3 years.

    Listed below are the more significant changes that are effective January 1, 2014. The changes are as follows:

    • Individual Income Tax:
    • Corporate Income Tax:
    • Sales Tax:
    • Other Tax Changes:

    For information on how this new law might impact you, please contact our office at 910.323.3100.

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    “Fiscal Cliff” Tax Changes – How You’re Going To Be Impacted

    The recently enacted 2012 American Taxpayer Relief Act includes a wide-ranging assortment of tax changes affecting both individuals and business. The sweeping tax package includes, among many other items, permanent extension of the Bush-era tax cuts for most taxpayers, revised tax rates on ordinary and capital gain income for high-income individuals, modification of the estate tax, permanent relief from the alternative minimum tax (AMT) for individual taxpayers, limits on the deductions and exemptions of high-income individuals, and a host of retroactively resuscitated and extended tax breaks for individual and businesses. Here’s a look at the key elements of the package:

    • Tax rates.
    • Estate tax.
    • Capital gains and qualified dividends rates.
    • Personal exemption phaseout.
    • Itemized deduction limitation.
    • AMT relief.
    • Tax credits for low to middle wage earners.
    • Section 179 expensing.
    • Additional first-year (bonus) depreciation.
    • Tax break extenders.
    • Pension provision.
    • Energy-related tax breaks.
    • Payroll tax cut is no more.

    We hope this information is helpful. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call.

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    E-Verify Mandatory in NC for Businesses with 25 or More Employees

    A state law requiring verification of employees’ legal standing to work in the United States is rolling out. Consequently, employers should become familiar with the law as quickly as possible. For employers that employ 100 or more but less than 500 employees, the effective date is January 1, 2013. For employers that employ 25 or more but less than 100 employees, the effective date is July 1, 2013. For purposes of determining your company’s effective date, consider only the number of employees working in North Carolina.

    An employer covered by the law must register for and start using the federal government’s E-Verify program to verify newly hired employees’ eligibility to work. E-Verify is a free online system that serves as an additional verification to employers’ standard Form I-9 obligations. With E-Verify, information is checked against data contained in federal databases at Homeland Security and the Social Services Administration. All U.S. employers must complete and retain an I-9 Form for each individual they hire in the U.S. An employer covered by the law will be required to enter a new hire’s information reported on the Form I-9 into the E-Verify program to determine the eligibility of that employee to work in the United States. An employer must retain the records of the verification of the employee’s work authorization during the length of that employee’s employment and for one year after the end of the employment period.

    The requirement does not include an employer’s existing employees – only new hires after the effective date(s). It also excludes from coverage seasonal temporary employees who are employed for 90 or fewer days during a 12-consecutive-month period, and the law also does not apply to employers that employ fewer than 25 employees in North Carolina. A rehire is always considered a new hire for E-Verify purposes and therefore must be re-verified upon hire.

    Employers begin the E-Verify enrollment process at the U.S. Citizenship and Immigration Service’s website: https://e-verify.uscis.gov/enroll/StartPage.aspx?JS=YES. E-Verify requires that the employer initiate E-Verify procedures for new employees within three employer business days after the employee has been hired and after the Form I-9 has been completed. E-Verify prohibits the use of E-Verify before an applicant has been hired and before the Form I-9 has been completed.

    The employer will be able to print a confirmation or tentative non-confirmation screen containing the E-Verify case verification number for attachment to the employee’s Form I-9.  This document is sufficient to show that the employer has verified the work authorization of the employee in question in accordance with the E-Verify law.

    Civil penalties for violations of North Carolina’s E-Verify law are assessed by the North Carolina Commissioner of Labor and range from $1,000 to $10,000.

    For more information about instituting an E-verify program, please contact our office at 910.323.3100.

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    New 2012 $50,000 Deduction for Net Business Income

    For 2012, a new personal income tax deduction from your North Carolina tax return for net business income will reduce taxes for many business owners. Up to $50,000 of non-passive net business income will be deducted for individuals and up to $100,000 will be deducted for a married couple filing a North Carolina joint return if each spouse receives net business income.

    Net business income includes income from sole proprietorships, LLCs, S corporations, and partnerships. It does not include “passive” income under the federal tax code.

    Here are a few examples:

    1. Mark has a dental practice formed as an LLC. He has $150,000 net business income from his practice. He would receive a deduction of $50,000 of the net business income on his personal NC tax return.
    2. Bill is a 25% shareholder in an S corporation. His wife Susan is a 50% partner in a beauty shop. Bill reports a $20,000 loss from the S corp. Susan reports $60,000 income from the partnership. The couple may claim a net business income deduction of $50,000 on their NC return against the beauty shop income. The deduction is applied separately to each spouse’s net business income, not to exceed $50,000 per spouse.
    3. Robert reports $80,000 non-passive net business income from a Schedule C and his wife Joanna reports a net profit of $20,000 from her Schedule C real estate sales business. The couple is entitled to claim a NC net business deduction of $70,000 ($50,000 for Robert and $20,000 for Joanna).
    4. Chris reports $68,000 net income from her rental activities. Chris does not meet the criteria to be considered a real estate professional. This activity is considered passive income and the deduction is not allowed.

    This state income tax deduction could result in tax savings of $3,500 for each $50,000 reduction in North Carolina taxable income based on an average state tax rate of 7%.

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    Payroll Tax Cut Extended Through End of 2012

    Under current law, the employee-side Social Security tax equals 6.2% of the first $110,100 of wages, and the self-employment side equals 12.4% of such self-employment income. In December 2010, however, Congress reduced these tax rates by two percentage points during 2011. This meant that employees paid only 4.2% on wages and self-employed individuals paid only 10.4% on self-employment income.

    The recently enacted Temporary Payroll Tax Cut Continuation Act of 2011 extended this tax cut through February 2012.

    Congress passed legislation Friday extending the payroll tax cut through the remainder of the year. President Obama is expected to sign it into law before the current two-month extension expires at the end of this month. As a result, for 2012, employees will pay only 4.2% Social Security tax on wages up to $110,100 (wage base for 2012) and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $110,100.

    Every year, McFadyen & Sumner continuously monitors changes in local, state, and federal laws that affect our clients. You can be assured that we will continue to take care of the administrative details – so you can focus on running your business.

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