In this issue: Tax Planning 4Element Advisors Entrepreneurs

November 2013
In this issue:
Tax Planning
4Element Advisors
Entrepreneurs
Contact Information
1|Page
Table of Contents
Table of Contents
Year End Tax Planning …………………………………………………………. 3
Individual Tax Rate Management …………………………………………………………….. 4
3.8 Percent Net Investment Income Tax
Additional 0.9 Percent Medicare Payroll Tax
Increased Maximum Tax Rates on Long-Term Capital Gains
Recognition of Same-Sex Marriage for Federal Tax Purposes
Tax Strategies for Individuals………………………………………………………………….. 7
Managing the Alternative Minimum Tax
Delaying or Prepaying Expenses
Grouping Deductions
Itemized Deduction Phaseout
Exemption Phaseout
Accelerating or Deferring Income
Contributing to a Retirement Plan
Other Personal Tax Planning Considerations ……………………………………………...... 15
Withholding/Estimated Tax Payments
Losses from Pass-Through Business Entities
Employee Stock Options
Flexible Spending Accounts
Other Individual Tax Credits
Estate and Gift Taxes
Tax Strategies for Business Owners ………………………………………………………….. 18
Timing of Income and Deductions
Retirement Plans
Business Equipment
Home Office Deduction
Credits
Conclusion ……………………………………………………………………………………... 19
4 Element Advisors …………………………………………………………….. 20
4 Element Advisors, LLP
Quarterly Commentary - Scary Headlines, Remarkable Return
Entrepreneurs …………………………………………………………………... 23
CCA Client Corner
A Small Business Profile - Floor Coverings International
Contact Information ……………………………………………………………. 25
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Tax Planning
Year End Tax Planning
Tax planning is inherently complex given the nature and complications with the tax code these days.
But due to legislation this past year, the tax code now burdens us with multidimensional tax rates
and structure, making planning even more difficult.
We focus here on tax planning techniques that can be executed during the remainder of 2013, but
your facts and circumstances may open up other opportunities or limit some of the tactics discussed.
Again, if you think any of these strategies may help you manage your current-year tax liability or
would like to discuss tax planning for 2013 and beyond, please let us know.
We will be covering the following tax categories throughout this article; individual tax rate
management, tax strategies for individuals, personal tax planning considerations, and tax strategies
for business owners.
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Tax Planning
Tax Planning Continued
Individual Tax Rate Management
In prior years, the main concern was that, if you reduced your regular income tax too far, the
alternative minimum tax (AMT) would step in to appropriate your hard-earned tax savings. We now
have additional dynamics to consider, when certain thresholds are exceeded, in the form of a 3.8
percent net investment income (NII) tax levied on investment income, a 0.9 percent Medicare
payroll tax levied on wages and self-employment earnings, and a multi-tiered long-term capital gains
tax rate structure.
New Taxes for 2013
Rate (%)
3.8%
0.9%
Single
Head of
Household
Married Filing
Jointly Surviving
Spouses
Married Filing
Separately
NII tax can apply for modified AGI over these thresholds
Over $200,000
Over $200,000
Over $250,000
Over $125,000
Wage/self-employment earnings thresholds for additional Medicare payroll tax on
wages and net earnings from self-employment
Over $200,000
Over $200,000
Over $250,000
Over $125,000
Additionally, the 39.6 percent tax bracket returns this year after a long hiatus for taxpayers above the
following thresholds:
Rate (%)
Single
Head of
Household
Married Filing
Jointly Surviving
Spouses
Married Filing
Separately
10%-35%
39.6%
$0-$400,000
Over $400,000
$0-$425,000
Over $425,000
$0-$450,000
Over $450,000
$0-$225,000
Over $225,000
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Tax Planning
Tax Planning Continued
3.8 Percent Net Investment Income Tax
The 3.8 percent NII tax now applies to most investment income. For individuals, the amount
subject to the tax is the lesser of:
1. Net investment income; or
2. The excess of modified adjusted gross income (MAGI) over the applicable threshold amount
(shown in the previous table).
NII includes dividends, rents, interest, passive activity income, capital gains, annuities and royalties.
Passive pass-through income will be subject to this new tax, but nonpassive will not. Selfemployment income, income from an active trade or business and portions of the gain on the sale of
an active interest in a partnership or S corporation with investment assets, as well as IRA or qualified
plan distributions, are not subject to the NII tax.
For purposes of the NII tax, the threshold is generally adjusted gross income (AGI) as modified for
certain foreign earned income.
► Planning Point – Weighing a decision about selling marketable securities to meet
current cash needs? Consider using margin debt for replacement securities. The interest on
the debt will be deductible, subject to the investment interest limitation, which could reduce
your NII for purposes of the new tax.
► Planning Point – To the extent your NII is income from a passive activity, increasing
your material participation in the activity between now and the end of the year can reduce
the amount of income subject to the NII tax. Proceed with caution, though, because a
change in participation level may impact other short- and long-term tax obligations.
► Planning Point – As you near the applicable threshold, consider revising the timing of
distributions from retirement plans to manage your net investment income. While the
distributions themselves are not NII, the distributions increase your MAGI, which could
subject more of your investment income to the NII tax.
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Tax Planning
Tax Planning Continued
Additional 0.9 Percent Medicare Payroll Tax
An additional 0.9 percent Medicare payroll tax applies to earnings of self-employed individuals and
wages in excess of the previously noted thresholds.
Increased Maximum Tax Rates on Long-Term Capital Gains
While avoiding or deferring tax may be your primary goal, to the extent there is income to report,
the income of choice is long-term capital gain income thanks to the favorable tax rates available.
The available rates are as follows:
2013 Capital Gains Tax Rates (Not Including 3.8% Net Investment Income Tax)
Long-term capital gains and qualified dividends
Maximum rate*
Most investments – for those in these marginal ordinary tax brackets:
39.6% bracket
20%
25% to 35% bracket
15%
0% to 15% bracket
0%
Real estate (amount up to prior allowable
depreciation; balance of gain taxed at the same rate as
most investments)
25%
Investments classified as “collectibles”
28%
Short-term gains and nonqualified dividends
39.6%
*For those subject to the NII tax, the maximum rate could be 3.8 percentage points higher.
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Tax Planning
Tax Planning Continued
Recognition of Same-Sex Marriage for Federal Tax Purposes
Beginning in 2013, legally married same-sex couples must file a joint or married filing separately
return. The rules do not extend to cover domestic partnerships. The ruling is retroactive, opening up
a refund opportunity in certain circumstances for those who were previously prohibited from joint
filing. Amended returns may be, but are not required to be, filed for tax years still open by statute of
limitations.
Tax Strategies for Individuals
Not all taxpayers can control the timing of when income is received, but timing of receipt is a
powerful planning tool. For those taxpayers who can control the timing of receipt, or for the rest of
us who can determine when deductible expenses are paid, an opportunity exists to permanently
reduce tax liability, particularly for taxpayers who are:
▲ In different tax brackets in 2013 compared with 2014;
▲ Subject to the AMT in one year and not the other;
▲ Subject to the 3.8 percent NII tax in one year and not the other; or
▲ Subject to the additional 0.9 percent Medicare tax on earned income in one year but not the
other.
Even when tax rates align year over year, accelerating deductible expenses into 2013 and/or
deferring income to 2014 or later years can provide extended use of the cash destined for taxes.
Maximize your tax deferral strategies by forecasting income tax positions for 2013 and, to the extent
possible, subsequent years. This means evaluating not only the amount of income but also the types
of income you anticipate generating, your marginal tax bracket, net investment income, wages and
self-employment earnings, and capital gains and losses.
Additionally, determining whether you are subject to the AMT in any given year is a critical planning
component.
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Tax Planning
Managing the Alternative Minimum Tax
Tax Planning Continued
The AMT applies when income, as adjusted for certain preference items, exceeds certain
exemptions, but the rate applied to that income falls below the AMT rate, essentially acting as a tax
leveling mechanism. Residents of states with high income and property taxes, like California, are
more likely to be subject to the AMT because these state taxes are not deductible when computing
AMT income.
Taxpayers subject to the AMT in 2013 should consider deferring payment of the following expenses
into 2014 to the extent the AMT could be inapplicable in the later year:
▲ State and local income taxes
▲ Real estate taxes (except rental property)
▲ Miscellaneous itemized deductions such as investment expenses and employee business expenses
The above expenses are not deductible for AMT purposes and could give rise to an increased tax
liability in a year the AMT is applicable. Careful management around the time of payment is
recommended.
On the other hand, if you do not expect to be subject to the AMT in 2013, but could be subject to
the AMT in 2014, you may want to prepay some of these expenses to secure a tax benefit in 2013.
But be careful: The more you prepay, the more likely you will become subject to the AMT.
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Tax Planning
Tax Planning Continued
Delaying or Prepaying Expenses
As a cash method taxpayer, you can deduct expenses when you pay them or charge them to your
credit card. Payment by credit card is considered paid in the year the charge is incurred.
Expenses that are commonly prepaid in connection with year-end tax planning include:
Charitable contributions – A tax deduction is available for cash contributions to qualified charities
of up to 50 percent of adjusted gross income (AGI) and up to 30 percent (20 percent for gifts to
private operating foundations) of your AGI for charitable gifts of appreciated property.
► Planning Point – Consider contributing appreciated securities that you have held for
more than one year. Usually, you will receive a charitable deduction for the full value of the
securities, while avoiding the capital gains tax that would be incurred upon sale of the
securities.
► Planning Point – For those charitable inclined taxpayers planning the sale of a
significant asset, consider implementing a charitable remainder trust. You may be able to
avoid capital gains tax on the sale and retain the income from investing the sales proceeds,
while securing a charitable deduction for at least part of the value of the property.
State and local income taxes – Consider prepaying any state and local income taxes normally due
on Jan. 15, 2014, or with the filing of the return if you do not expect to be subject to the AMT.
► Planning Point – If you expect to owe state and/or local income tax when you file your
return for 2013, consider paying that amount before Dec. 31, 2013. Although you relinquish
your cash in advance, the benefit from accelerating the tax deduction and lowering your
current federal income tax could be significant. It is particularly powerful if the deduction
could be lost through the AMT in 2014. Just be careful that your prepayment does not make
you subject to AMT in 2013.
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Tax Planning
Tax Planning
Tax Planning Continued
Real estate taxes – Like state and local income taxes, real estate tax levies due early in 2014 can
often be prepaid in 2013. For real estate taxes on your residence or other personal real estate, just be
mindful of the AMT in both years. Real estate tax on rental property is deductible whether or not
you are subject to AMT, and it can be safely prepaid.
Mortgage interest – There are limits on your ability to deduct prepaid interest. However, to the
extent your January mortgage payment reflects interest accrued as of Dec. 31, 2013, a payment prior
to year-end will secure the interest deduction in 2013.
Margin interest – For securities bought on margin, any interest accrued as of Dec. 31, 2013, will be
deductible this year only if you actually pay the interest by Dec. 31.
Other itemized deductions – Miscellaneous itemized deductions, like many deductions, are
deductible only if you itemize your deductions and are not subject to AMT. Where miscellaneous
itemized deductions differ is with the requirement that the total deductions exceed 2 percent of your
AGI to be deductible. Grouping these deductions in alternating years is often an effective taxplanning strategy.
Grouping Deductions
Many expenses are deductible only to the extent deductions are itemized. Taxpayers generally elect
to itemize deductions only if total deductions exceed the standard deduction for the period. If
itemized deductions hover near the standard deduction amount, grouping the deductions in
alternating years may maximize the benefit of the standard deduction.
Certain expenses are deductible as itemized deductions only to the extent they exceed a specified
percentage of your AGI. Medical expenses (10% of AGI, 7.5% of AGI if age 65 or older),
unreimbursed employee business expenses, investment expenses, and certain other miscellaneous
itemized deductions (2% of AGI) fall into this category.
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Tax Planning
Tax Planning Continued
Itemized Deduction Phaseout
After a three-year hiatus, 2013 marks the return of the phaseout of certain itemized deductions for
higher-income taxpayers. For affected taxpayers, itemized deductions are reduced by 3 percent of
the amount by which AGI exceeds a threshold. However, deductions for medical expenses,
investment interest, casualty and theft losses, and gambling losses are not subject to the limitation.
Taxpayers cannot lose more than 80 percent of the itemized deductions subject to the phaseout.
Phaseout of Itemized Deductions Based on AGI
Single
Head of Household
Married Filing Jointly
and Surviving Spouses
Married Filing
Separately
$250,000
$275,000
$300,000
$150,000
AGI Where Phaseout
Begins
Exemption Phaseout
A personal exemption is generally available for you, your spouse if you are married and file a joint
return, and each dependent (a qualifying child or qualifying relative who meets certain tests). In
2013, the exemption amount is $3,900, subject to a reinstated phaseout of the exemption for higherincome taxpayers.
Phaseout of Exemptions Based on AGI
Filing Status
Phaseout Begins at AGI of
Completely Phased Out at
AGI of
Single
$250,000
$372,500
Head of Household
$275,000
$397,500
Married Filing Jointly and
Surviving Spouses
$300,000
$422,500
Married Filing Separately
$150,000
$211,250
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Tax Planning
Tax Planning Continued
Accelerating or Deferring Income
Taxpayers with a degree of control over the timing of income receipt should consider the following
tax planning strategies:
Cash salaries and bonuses – Wages are taxed when received by the individual, but employers may
still avail themselves of a deduction in the year accrued. This combination makes for a strong
planning tool when facts align.
Self-employment income – For businesses operating on the cash method of accounting, invoices
issued that are not paid until 2014 are not taxed until the payment is received. The timing of the
issuance of invoices can defer income into future periods. Conversely, if you are trying to increase
2013 income, consider offering a discount to clients who settle accounts in 2013.
► Planning Point – Consider employing income planning techniques to manage earned
income. Maintaining income below the applicable thresholds avoids the new additional 0.9
percent Medicare tax.
Retirement plan distributions – If you are over age 59½ and your 2013 income is unusually low,
consider taking a taxable distribution from your retirement plan, even if it is not required, to use the
unusually low tax rate for the period. More powerful still, consider converting the funds to a Roth
account.
► Planning Point – If you expect to be in a higher tax bracket in the future, consider
converting your traditional IRA into a Roth IRA during your lower-income years. You will
be paying taxes early, but future appreciation of the assets in your account may escape
income taxes entirely.
IRA distributions to charity – If you are over age 70½, you can make a tax-free distribution of up
to $100,000 from your IRA to a qualified charity before Dec. 31, 2013. Under current law, this
opportunity will not be available for 2014.
Note that this opportunity is doubly powerful beginning in 2013. In addition to prior tax benefits,
now the IRA is not included in your MAGI, and thus this strategy may reduce exposure to the new
3.8 percent NII tax.
Capital gains – Generally, gains and losses from securities sales are recognized on the trade date,
not the settlement date. December trades will be 2013 transactions, even if the settlement date is in
January 2014.
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Tax Planning
Tax Planning Continued
U.S. Treasury bill interest – If you own a U.S. Treasury bill maturing early in 2014, you would
normally report the interest income when the bill matures. But selling the bill before Dec. 31, 2013,
has the effect of recognizing the interest accrued through the sale date.
Worthless securities and bad debts – Both worthless securities and bad debts could give rise to
capital losses. Since no transaction generally alerts you to this deduction, you should review your
portfolio carefully.
► Planning Point – If you own securities that have become worthless or made loans that
have become uncollectible, ensure that the losses are deductible in the current year by
obtaining substantive documentation to support the deduction.
Wash sales – The wash sale rule prevents you from claiming a loss on the sale of a security if you
acquire a substantially identical security within the 61-day period beginning 30 days before the sale
and ending 30 days after the sale. While this rule makes it difficult to claim a loss on a stock that you
want to keep in your portfolio, it is possible to manage around the time requirements.
► Planning Point – The wash sale rule does not apply to gains. If you want to harvest a
gain, you can sell the security and immediately repurchase it, resulting in a step-up in your
basis.
Bond swaps – To realize losses in your bond portfolio, it may be possible to sell a bond at a loss
and repurchase a very similar bond without running afoul of the wash sale rule.
► Planning Point – Bonds with different interest rates or maturity dates, even from the
same issuer, are generally not considered substantially identical.
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Tax Planning
Tax Planning Continued
Contributing to a Retirement Plan
Elective deferrals to a traditional 401(k) or similar plans and deductible contributions made to a
traditional IRA are limited as follows.
2013 Retirement Plan Contribution Limits
Type of Plan
Under Age 50
Age 50 and Older*
Traditional/Roth IRA
$5,500
$6,500
401(k)/403(b)/457(b)/SEP
$17,500
$23,000
SIMPLE IRA**
$12,000
$14,500
*Not all employer plans permit additional contributions by those who are age 50 and over.
Other contribution limitations could apply.
**Only SEP plans established before 1997 (SAR-SEPs) may allow employees to make pretax
contributions.
You and your spouse must have earned income to contribute to either a traditional or a Roth IRA.
Only taxpayers with modified AGI below certain thresholds are permitted to contribute to a Roth
IRA. If a workplace retirement plan covers you or your spouse, modified AGI also controls your
ability to deduct your contribution to a traditional IRA. There is no AGI limit on your or your
spouse’s deduction if you are not covered by an employer plan. If your modified AGI falls within
the phaseout range, a partial contribution/deduction is still allowed.
► Planning Point – If you would like to contribute to a Roth IRA, but your income
exceeds the threshold, consider contributing to a traditional IRA for 2013, and convert the
IRA to a Roth IRA in 2014. Be sure to inquire about the tax consequences of the
conversion, especially if you have funds in other traditional IRAs.
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Tax Planning
Tax Planning Continued
Other Personal Tax Planning Considerations
Withholding/Estimated Tax Payments
With higher rates in effect for 2013, more taxpayers may find themselves exposed to an
underpayment penalty. Underpayment penalties can be avoided when total withholdings and
estimated tax payments exceed the 2012 tax liability, or in the case of higher-income taxpayers, 110
percent of 2012 tax.
► Planning Point – If you expect to be subject to an underpayment penalty for failure to
pay your 2013 tax liability on a timely basis, consider increasing your withholding between
now and the end of the year to reduce or eliminate the penalty. Increasing your final
estimated tax deposit due Jan. 15, 2014, may reduce the amount of the penalty but is unlikely
to eliminate it entirely. Withholding, even if done on the last day of the tax year, is deemed
withheld ratably throughout the tax year.
Losses from Pass-Through Business Entities
If your ability to deduct current-year losses from a partnership, LLC or S corporation may be limited
by your tax basis or the “at risk” rules, consider contributing capital to the entity or, in some cases,
making a loan to the entity prior to Dec. 31, 2013, to secure your deduction this year.
► Planning Point – If you anticipate a net loss from business activities in which you do
not materially participate, consider disposing of the loss activity by Dec. 31, 2013. Assuming
sufficient basis exists, all suspended losses become deductible when you dispose of the
activity. Even if there is a gain on the disposition, you may still benefit from having the longterm capital gain taxed at 23.8 percent (inclusive of the NII tax) with the previously
suspended losses offsetting other ordinary income.
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Tax Planning
Tax Planning Continued
Employee Stock Options
Consider reviewing your employee stock options prior to year-end to determine whether they should
be exercised this year.
► Planning Point – Exercising most employee stock options will result in ordinary income,
which may be advantageous if you expect to be in a higher bracket in 2014. A secondary
benefit is that future stock appreciation after exercise may qualify for capital gain treatment.
► Planning Point – If you hold incentive stock options, a poorly planned exercise can be
very costly because the spread between the fair market value of the stock and the exercise
price is a tax preference item for AMT purposes.
Flexible Spending Accounts
Many employers sponsor flexible spending accounts (FSAs), which provide an opportunity to
contribute health and dependent care expenses on a pretax basis.
Health FSAs – For 2013, there is a $2,500 cap on the amount taxpayers can contribute to a health
FSA.
► Planning Point – Use health FSA dollars before Dec. 31, 2013 (or March 15, 2014, if the
2½-month grace period applies), to avoid the “use it or lose it” rule. Health FSA dollars
cannot be used for over-the-counter medications, except for insulin.
Dependent care FSAs – For 2013, the cap on the amount taxpayers can contribute to a dependent
care FSA is $5,000 ($2,500 if married filing separately).
► Planning Point – A taxpayer (and spouse, if married) qualifying for the dependent care
tax credit is generally better off using the FSA in tax brackets higher than 15 percent. The
FSA income exclusion provides savings at the top marginal rate and may also avoid FICA
(Social Security and Medicare) taxes on the amount contributed to the FSA.
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Tax Planning
Tax Planning Continued
Other Individual Tax Credits
Child tax credit – The child tax credit of up to $1,000 per dependent child under age 17 has been
made permanent. The credit is reduced and eventually eliminated when adjusted gross income
exceeds $75,000 for single taxpayers or $110,000 for married taxpayers filing a joint return. Tax
planning to reduce AGI may provide a larger child tax credit for the year.
American Opportunity Tax Credit (AOTC) – The AOTC for college costs has been extended for
five years through 2017. A credit of up to $2,500 may be claimed during the first four years of
college. The credit phases out for AGI in excess of $80,000 for single taxpayers and $160,000 for
married taxpayers filing a joint return.
► Planning Point – If your income is too high for you to qualify for the AOTC, consider
gifting your children the funds necessary to pay the qualified education expenses, making
them eligible to claim the AOTC.
Energy credit – The $1,500 credit for new windows and doors has expired, but a credit of up to
$500 for residential energy property is still available if prior years’ credits were not taken.
Estate and Gift Taxes
For 2013, taxpayers are permitted to make tax-free gifts of up to $14,000 per year, per recipient
($28,000 if married and using a gift-splitting election, or if each spouse uses separate funds). By
making these gifts annually, taxpayers can transfer significant wealth out of their estate without using
any of their lifetime exclusion.
► Planning Point – Consider making similar gifts early in 2014. Each year brings a new
annual exclusion, and a gift early in the year transfers next year’s appreciation out of your
estate.
► Planning Point –Additional gifts can be made using the lifetime gift exclusion, which is
$5.25 million ($10.5 million for married couples) in 2013. Future exclusions are indexed for
inflation. The recent increases to the exclusion make it a good time to review any existing
estate and gift plans to ensure they best meet your needs.
► Planning Point – When combined with other estate and gift planning techniques, such
as Section 529 plans to help fund your children’s or grandchildren’s college education or a
GRAT (grantor retained annuity trust), the potential exists to avoid or reduce estate and gift
taxes, while transferring significant wealth to other family members.
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Tax Planning
Tax Planning Continued
Tax Strategies for Business Owners
Timing of Income and Deductions
Cash-basis businesses can manage income by prepaying or deferring payment of business expenses,
securing the deduction in the year they anticipate higher tax rates. If they are concerned about their
cash flow but need the deduction, a credit card secures the deduction when the charge is made.
Merely purchasing an item “on account” is not considered payment for tax purposes.
Retirement Plans
Starting a small business retirement savings plan is easier than you think and offers significant tax
advantages. Employer contributions are deductible from the employer’s income, employee
contributions are not taxed until distributed to the employee, and investments in the program grow
tax-deferred. Further, the tax law offers a small incentive of a $500-per-year tax credit for the first
three years of a new SEP, SIMPLE or other retirement plan to cover the initial setup expenses for
certain small employers.
Business Equipment
Significant tax benefits remain available for business equipment purchases during 2013. A 50 percent
bonus depreciation deduction is available for qualified property placed in service during 2013. The
deduction is set to expire for 2014. To qualify for bonus depreciation, equipment must be new and
placed in service by year-end.
Section 179 expensing rules provide full expensing for up to $500,000 of qualifying property placed
in service during 2013. However, the full deduction is available only if the total amount of qualifying
property placed in service in 2013 does not exceed $2 million. The Section 179 deduction limit is
scheduled to be drastically reduced in 2014.
► Planning Point – If you are planning to purchase a significant amount of machinery and
equipment for your business in the next year or two, consider accelerating your order so the
assets are delivered and placed into service by Dec. 31, 2013. To take full advantage of the
Section 179 deduction, monitor total purchases to prevent its phaseout.
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Tax Planning
Tax Planning Continued
Home Office Deduction
Starting in 2013, taxpayers who use their home for business are allowed to compute their deduction
using a simplified method. In lieu of actual expenses such as electricity, depreciation, etc., they may
compute their qualifying home office deduction at $5 per square foot, up to $1,500 annually.
Credits
Taxpayers with qualifying research expenditures may qualify for the often-overlooked research and
experimentation tax credit. The Work Opportunity Tax Credit for qualifying employees is another
credit that is frequently overlooked.
Conclusion
The changes initiated during 2013 added layers of complexity to an already difficult tax system, but
with a purposeful, informed plan in place, taxpayers can still reap significant benefits. Please let us
know how we can best support you in building your plan for 2013 and beyond.
The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without
further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained
herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.
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4 Element Advisors
4 Element Advisors LLC
Quarterly Commentary
Scary Headlines, Remarkable Returns
The threat of a government shutdown virtually guaranteed that the investment markets would close
out the third quarter with a whimper rather than a bang. The S&P 500 index lost 1.1% of its value
in the final week of the quarter as the U.S. Congress seemed to be lurching toward a political
standstill that would shut down the U.S. government. All the uncertainty has tended to obscure the
fact that most U.S. stock market investors have experienced significant gains so far this year.
And the recent quarter was no exception. Despite the rocky final week, the Wilshire 5000--the
broadest measure of U.S. stocks and bonds--rose 6.60% for the third quarter--and now stands at a
22.31% gain for the first nine months of the year. The comparable Russell 3000 index gained 6.35%
in the most recent three months, posting a 21.30% gain as we head into the final stretch of 2013.
Other U.S. market sectors experienced comparable gains. Large cap stocks, represented by the
Wilshire U.S. Large Cap index, gained 6.24% in the second quarter, and are up 20.77% so far for the
year. The Russell 1000 large-cap index returned 6.02% for the quarter, up 20.76% for the year,
while the widely-quoted S&P 500 index of large company stocks gained 5.32% for the quarter and is
up 18.62% since January 1.
The Wilshire U.S. Mid-Cap index rose 9.02% in the latest three months of the year, and is up
26.19% as we enter the final quarter. The Russell midcap index was up 7.70% for the third quarter,
and now stands at a 24.34% gain so far this year.
Small company stocks, as measured by the Wilshire U.S. Small-Cap, gained 9.68% in the third
quarter; the index is up 27.53% so far this year. The comparable Russell 2000 small-cap index was
up 10.21% in the second three months of the year, posting a 27.69% gain in the year's first nine
months. The technology-heavy Nasdaq Composite Index was up 11.16% for the quarter, and has
gained 25.24% for its investors so far this year.
In the first half of the year, any diversification into investments other than U.S. stocks was dragging
down returns. No longer. The broad-based EAFE index of larger foreign companies in developed
economies rose 10.94% in dollar terms during the third quarter of the year, and is up 13.36% so far
this year. The biggest surprise is Europe: a basket of European stocks rose 13.16% over the past
three months, which accounts for virtually all of their returns this year; the index is now up 13.17%
for the year.
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44Element
ElementAdvisors
Advisors
Emerging markets stocks are climbing out of a deep hole that they fell into earlier in the year,
returning 5.01% in the past three months, even though the EAFE Emerging Markets index is still
down 6.42% for the year.
Other investment categories are not faring so well. Real estate, as measured by the Wilshire REIT
index, fell 1,98% for the quarter, though it is still standing at a 3.84% gain for the year.
Commodities, as measured by the S&P GSCI index, reversed their recent slide and rose 5.44% this
past quarter, taking them nearly even, just down 0.27% so far in 2013. Gold prices perked up on the
uncertainty over
the government shutdown, gaining 9.26% in the recent quarter, though gold investors have lost
20.48% on their holdings so far this year.
Bonds have continued to provide disappointing returns both in terms of yield and total return. The
Barclay's Global Aggregate bond index is down 2.24% so far this year, and the U.S. Aggregate index
has lost 1.87% of its value in the same time period.
In the Treasury markets, the year has seen a bifurcated market; declining yields in bonds with 12
month or lower maturities, while longer-term bonds have experienced rising yields and a
corresponding decline in the value of the bonds held by investors. In the past year, the yield on 10year Treasuries have risen almost a percentage point, to 2.65%, and 30-year bonds are now yielding
3.73%, up 86 basis points over the past 12 months.
Municipal bonds have seen comparable rate rises; a basket of state and local bonds with 30-year
maturities are now yielding 4.32% a year; 10-year munis are returning an average of 2.56% a year.
The rises, of course, have caused losses in muni portfolios.
Perhaps the most interesting thing to notice about America's 20+% stock market returns so far this
year--extraordinary by any measure--is that they were accomplished at a time when investors seemed
to be constantly skittish. Just a few weeks ago, everybody seemed to be worried that the Federal
Reserve would end its QE3 program and let interest rates find their natural balance in the economy.
One might wonder why this would be such a scary event, since it is the Fed's economists way of
telling us that the U.S. economy is finally getting back on its feet.
All eyes are still on Washington, but now they've moved from the Fed to the Capitol Building. The
question everybody has been asking in the final days of the quarter is: what would be the investment
and economic impact of a government shutdown? This question might be one to consider going
forward, since the two parties seem to have a lot of fundamental disagreements over spending
priorities, and budget battles could become quarterly events.
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4 Element Advisors
In our opinion the Government shutdown or showdown was largely a non –investment issue and
not a trade worthy event for one main reason. There wasn’t a single congress person who would
allow the stoppage of social security checks. That is the third rail of politics and they would be held
accountable by the recipients of those checks. The recipients of those checks also happen to be the
segment of the population that votes…every time.
What does all this mean for your investments in the final quarter? Who knows, but the beginning of
the quarter certainly has not disappointed. Nobody could have predicted, at the start of the year,
with all the hand-wringing over the fiscal cliff and new tax legislation, that we would be standing
nine months into 2013 with significant investment gains in the U.S. markets and a resurgence in
global investments led by, of all places, Europe.
This much we can predict: the recent uncertainties--the paralysis in Congress, worries about the
direction of interest rates and whether the Fed is going to stop intervening in the markets--will give
way to new worries, new uncertainties, which will make all of us feel in our guts like the world is
going to hell in a hand basket.
But the headlines obscure the fact that investment returns are created the hard way, by millions of
people getting up in the morning and going to work and spending their day finding ways to improve
American businesses, generate profits, create new products and new markets, day after day after day.
Whatever ups and downs you will experience--and you WILL experience them, perhaps in the next
quarter or the next year--that underlying driver of business enterprises and stock value is constantly
working on your behalf. That will be true no matter what the headlines say, no matter how spooked
you feel about whatever scary thing is going on in the world. Nobody enjoys the investment ride the
way children enjoy the thrills of a roller coaster, but both seem to ultimately deliver their riders to a
semblance of safety in the end.
Best Regards,
4Elemet Advisors LLC
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Entrepreneurs
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CCA Client Corner
A small business profile
Floor Coverings International Concord is a flooring and tile remodeling business, owned and
operated by three brothers, Reggie, Kreg, and Bryan Keding.
The brothers decided to come together to open FCI after years of working separately in the
construction industry. They all shared the desire to start a company that would take their expertise
and experience in the construction world to improve on the pitfalls and shortcomings of other
contracting companies, while focusing on superior customer service.
“Being in the field for most of my career has allowed me the opportunity to see the details and
aspects of what makes a job go smoothly and what it takes to have a great finished product,” says
Kreg.
FCI provides flooring and tile to residential and commercial clients. They also work closely with
contractors, designers, and others in the trade, to streamline the remodeling process and provide
clients with the final product selection.
According to Bryan, the coined “universal soldier” of the company, they pride themselves on being
able to offer and recommend the best products and designs for each individual that walks in to their
store.
“Having split my time in the field as an estimator and a project coordinator,” says Bryan, “I can see
the big picture of what customer satisfaction is made of.”
The brothers gained their experience and knowledge of the industry from operating on the
installation and construction side of remodeling. They were a part of executing the finished product
and gained a strong sense of what customers want versus what they receive. They saw a huge
opportunity for improvement in this aspect of the contracting world and that is how the idea for
FCI was born.
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Entrepreneurs
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“What makes us unique is first having experienced serving the client with professional installation,”
says Reggie, “When you are installing you know what is right for the job, so we can recommend the
best products for each job and help them with purchasing their materials.”
According to Reggie, their favorite part of owning a small business is being able to build
relationships with each of their customers, while offering personal and specialized advice; an
opportunity they would never have if they worked at a larger corporation.
“Small business is personal. People purchase with us because of our personal service and advice,”
says Reggie. “We are not a big box store on Main Street so we need to create an experience that
builds relationships and gets customers talking about us.”
While they have experienced a fair share of obstacles and drawbacks, the Kedings credit their
success to their drive and willingness to get back up when met with failure. They also owe a lot of
their success to the support and motivation they receive from one another.
“For us it’s simple – all three brothers work together. We all have different strengths, and together
we make a great team,” says Reggie.
The Keding brothers hope to continue their
steady and stable growth and would like to open
up a second store in the next one to two years.
For more information you can contact:
Reggie Keding
Floor Coverings International
1000 Detroit Avenue Ste F.
Concord, CA 94518
Phone: (925) 363-4842
“Inspiration at your feet & flooring
for your life.”
If you would like to be featured in the Client Corner of our newsletter please contact Kayla Koterbay at
[email protected]
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COATES CORTESE & ALVARADO, LLP
2300 Contra Costa Blvd., Suite 220
Pleasant Hill, CA 94523
Phone (925) 685-2911
Fax (925) 680-2709
Linda Conant
Admin Assistant…………………………….………...Ext. 200
Charlotte Coates
Staff Accountant…………………………….………..Ext. 201
Kayla Koterbay
Tax Processor…………………………………………Ext. 202
Will Coates, CPA
Director of Financial Services…………..…….…..…...Ext. 203
Vince Cortese, CPA
Tax Partner…………………………………….……..Ext. 204
Ken Callan, E.A
Tax Partner………………………...………………....Ext. 205
G. Alvarado, E.A
Tax Partner…………………………………....……..Ext. 206
Maria Lyan
Sr. Accountant……………...……….....................……Ext. 207
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