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CO VER S T OR Y E CONOMICS Outlook for Top Individual Tax Rates WAGE INCOME CAPITAL GAINS 2012 Top Tax Rate 2001-03 Tax Cut Expiration** 36.45%* 4.6% 2 013 Phase-out of Itemized Deductions 1.2% 2013 Health Insurance Surtax Total Increase in Tax Rate 2013 Top Tax Rate Source: PriceWaterhouseCoopers Other exemptions include seeds, plants and fertilizer, packaging materials, promo- tional/advertising materials and oak bar- rels. However, use tax is due on packaging costs for wine used in promotions. IC DISC One little-known provision of the IRS code can provide significant savings for export- ers: It's the Interest Charge Domestic In- ternational Sales Corporation (IC-DISC), a tax-exempt domestic corporation set up as a brother/sister of a C or an S corporation or partnership. It offers two opportunities: to convert ordinary income into dividend income (now taxed at 15%), or to allow a shareholder to defer tax on part of export- related income. It can defer tax on com- missions up to $10 million. Repair regulations The IRS regulations related to repairs on equipment have been a bit murky, and the agency is attempting to clarify them, but the result is a massive amount of com- plexity and paperwork. This is definitely territory for an expert. Domestic producers The code also allows a tax deduction of up to 9% for domestic producers, and the rules allow storage, handling and pro- cessing to qualify as well as growing or winemaking. It even applies if the product is grown outside the U.S., as long as the taxpayer's business is here. One caveat is that if a company separates its activities into different companies, the impact may be reduced. Including tasting room revenue in a business that produces wine would help shelter that revenue, for example. In addition, the federal debt should hit its ceiling of $16.394 trillion in late 2012 or early 2013, and $1.2 trillion in across- the-board discretionary spending cuts will occur Jan. 3, 2013, unless Congress and the president reach an agreement to change this. Health care changes Major changes and increased expenses will hit almost everyone as the health care act goes into effect, but it should also result in improved coverage for many Americans. Costs include an additional 0.9% tax on wages more than $200,000 (individu- al)/$250,000 (couple), plus 3.8% tax on investment (non-wage) income. Corporations also will have to start reporting on their coverage. Increased taxes Scariest of all for most people, the top fed- eral tax rate will rise 6.7% to 43.15% on wages (1.45% more for the self-employed), grow from 15% to 25% on capital gains and from 15% to 44.6% on dividends— that's assuming Congress doesn't act. California proposed to raise taxes for those earning more than $300,000 (single) and $600,000 (joint) from 9.3% to 10.3%; for incomes greater than $500,000 (single) and $1 million (joint), taxes will rise to 11.3%. An extra 1% surcharge as- sessed to those earning more than $1 million is separate from this increase. That equates to a total potential tax of more than 53.3% for high-wage earners. Of course, rates for those earning less will be much less. Finally, individuals have $5 million exempt for gift taxes and estates during 2011-12. Next year, that drops to $1 million. In somewhat good news, how- ever, few of the proposed major changes in financial reporting have been adopted. All the changes—plus the many obscure provisions that benefit farmers—make it imperative that wineries and growers have good ad- vice from knowledgeable accoun- tants now more than ever. And one caveat: Many of these dire tax changes may be avoided by actions from Congress and the president. 0.9% 6.7% 43.15% 15% 5% 1.2% 3.8% 10% 25% * Additional 1.45% current employee/self-employed share of Medicare HI tax applies ** Assumes expiration of 2001-03 tax cuts after 2012. DIVIDENDS 15% 24.6% 1.2% 3.8% 29.6% 44.6% Expiring provisions O ne short-term benefit for all companies is the ability to take a special deduc- tion for assets placed in service during re- cent years, as long as the total expenditures are under $2 million in 2010 or 2011, $500,000 this year and $200,000 in 2013 and beyond. The maximum deduction ranges from $500,000 in 2010 or 2011, to $125,000 this year—but only $25,000 starting in 2013. Many tax reductions have just expired, and others are about to—most of them left- overs from recent tax incentives to spur busi- ness after 9/11 and due to the recession. Several expired during 2011: alternate minimum tax relief for 2012, 100% bonus depreciation, R&D credit, CFC look-through, active financing exemption and 15-year leasehold amortization. A number are now scheduled to expire this year but may be maintained by Congres- sional action. Some, however, may not be settled until after the national election: • Extension of 2001-03 individual tax cuts and deduction limitations. • Estate and gift tax at 35% top rate and $5 million exemption • Lowered capital gains and dividend tax rates • 50% bonus depreciation • Payroll tax and unemployment relief • Highway trust fund taxes • Medicare physician reimbursement P.F. WINES & VINES SEPTEMBER 2012 41 WINE INDUS TR Y FINANCE