April 2015

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W ith the enactment of the Patient Protection and Affordable Care Act of 2010 (PPACA), also known as ObamaCare or the Affordable Care Act, many dealers may have been erroneously snared by a new tax. is new tax, the Net Investment Income Tax, imposes a flat 3.8 percent tax on net invest- ment income (NII) and was intended to impact higher income individuals as well as certain trusts and estates with income from passive investments (e.g., interest, dividends, capital gains, etc.). e 3.8 percent NII tax had been thought of as a straightforward tax that would be assessed on all passive income that did not require the taxpayer's efforts to produce beyond selecting and monitoring the investments. e NII tax applies only to indi- viduals, trusts and estates. It does not apply to C corporations. Although pass-through entities such as partner- ships and S corporations do not pay the tax directly, the income passed through to the individual partners or shareholders may be subject to the net investment income tax. For the majority of taxpayers, net investment income includes but is not limited to: n Interest income n Dividends received n Long-term and short-term capital gains n Gains from the sale of real estate investments n Income passed through to an non- active partner or S corporation shareholder n Rents from properties held but not actively managed is article deals with the impact of the final item on dealers and their dealerships. e congressional intent behind the tax on NII was basically to tax unearned, passive type income, generated within a typical investment portfolio and from business income in which the taxpayer is a passive owner. However, the statutory language used to realize this intention has proven that a simple concept does not neces- sarily translate into simple rules. e IRS has clearly stated that the Passive Activity Rules and definitions apply in determining the applicability of the NII tax. ese rules indicate that rental activities (unless qualifying under an exception) will be considered passive. Unfortunately, many CPAs have assumed that the rental of equip- ment by dealerships is subject to the NII tax. We would like to explore ways in which a dealer may eliminate or reduce this tax. As mentioned above, the Internal Revenue Service has carved out several exceptions relating to the determina- tion of whether a rental activity is considered passive. Specifically, these exceptions are: A) e average period of customer use is seven days or less – Since the regulations require that the deter- mination of days is made by using the actual periods of customer use including extensions and renewals of the rental agreements, dealers may only be able to take advantage of this exception on a limited basis. B) e average period of customer use is 30 days or less and significant personal services are provided by the owner in connection with the rental – As with exception A, due to the rental period (including extensions/ renewals) dealers may only be able to take advantage of this exception on a limited basis. C) Extraordinary personal services are provided by the owner in connec- tion with the rental of the tangible property without regard to the aver- age period of customer use – While dealers typically provide significant services (transportation, loading/ unloading, maintenance, repair, inspections, training, etc.) dealers do not typically provide extraordinary services as defined in the regula- tions; accordingly, this exception will infrequently be of use to a dealer. 40 | www.cedmag.com | Construction Equipment Distribution | April 2015 >> ACCOUNTING REX COLLINS Are You Exempt From Obamacare's Accidental Tax? Dealer rental operations are still an unintended target – but not all will get stuck paying the ACA's Net Investment Income Tax. A simple concept does not necessarily translate into simple rules.

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