Nov 7
As 2013 draws to a close, there is still time to reduce your 2013 tax bill and plan ahead for 2014. This post highlights several potential tax-saving opportunities for you to consider. Please click here to meet with Paul to discuss specific strategies and issues.
Deferring Income into 2014
Deferring income to the next taxable year is a time-honored year-end planning tool. If you expect your AGI to be higher in 2013 than in 2014, or if you anticipate being in the same or a higher tax bracket in 2013 than in 2014, you may benefit by deferring income into 2014. Some ways to defer income include:
Use of Cash Method of Accounting: By using the cash method of accounting instead of the accrual method of accounting, you can generally put yourself in the best position for accelerating deductions and deferring income. There is still time to accomplish this strategy, because an automatic change to the cash method can be made by the due date of the return including extensions. The following three types of businesses can make an automatic change to the cash method: (1) small businesses with average annual gross receipts of $1 million or less (even those with inventories that are a material income producing factor); (2) certain C corporations with average annual gross receipts of $5 million or less in which inventories are not a material income producing factor; and (3) certain taxpayers with average annual gross receipts of $10 million or less. Provided inventories are not a material income producing factor, sole proprietors, limited liability companies (LLCs), partnerships, and S corporations can change to the cash method of accounting without regard to their average annual gross receipts.
Delay Billing: Delay year-end billing to clients so that payments are not received until 2014.
Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you have control as to when dividends are paid, arrange to have them paid to you after the end of the year.
Accelerating Income into 2013
You may benefit from accelerating income into 2013. For example, you may anticipate being in a higher tax bracket in 2014, or perhaps you need additional income in 2013 to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2013 will be disadvantageous if you expect to be in the same or lower tax bracket for 2014.
If you report income and expenses on a cash basis, issue bills and attempt collection before the end of 2013. Also, see if some of your clients or customers are willing to pay for January 2014 goods or services in advance. Any income received using these steps will shift income from 2014 to 2013
Business Deductions
Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 10%-of-AGI floor.
Equipment Purchases: If you purchase equipment, you may make a “Section 179 election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property. For 2013, you may elect to expense up to $500,000 of equipment costs (with a phase-out for purchases in excess of $2,000,000) if the asset was placed in service during 2013. Note that for assets placed in service in 2013, taxpayers can expense 50% of their business equipment purchases under a provision giving taxpayers bonus depreciation, mitigating the need for the §179 election.
In 2014, the dollar amounts for §179 expensing are scheduled to be $25,000, with a phase-out amount of $200,000. Although there is a chance the 2014 figures will go up if Congress acts, it would be wise to place more assets in service in 2013 if you have yet to hit the $500,000 figure.
In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2013. In general, under the “half-year convention,” you may deduct six months’ worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers your depreciation deduction.) A popular strategy in recent years is to purchase a vehicle for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limit, $11,160 for 2013 (due to bonus depreciation rules), $11,360 in the case of vans and trucks (due to bonus depreciation rules). Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000.
NOL Carryback Period: If your business suffers net operating losses for 2013, you generally apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2011. Certain “eligible losses” can be carried back three years; farming losses can be carried back five years.
Bad Debts: You can accelerate deductions to 2013 by analyzing your business accounts receivable and writing off those receivables that are totally or partially worthless. By identifying specific bad debts, you should be entitled to a deduction. You may be able to complete this process after year-end if the write-off is reflected in the 2013 year-end financial statements.
Home Office Deduction: Expenses attributable to using the home office as a business office are deductible under §280A if the home office is used regularly and exclusively: (1) as a taxpayer’s principal place of business for any trade or business; (2) as a place where patients, clients, or customers regularly meet or deal with the taxpayer in the normal course of business; or (3) in the case of a separate structure not attached to the residence, in connection with a trade or business.
Capitalization of Tangibles: Final regulations providing guidance on the application of §§162(a) and 263(a) to amounts paid to acquire, produce, or improve tangible property, expand the definition of materials and supplies to include property with an acquisition or production cost of $200 or less, clarify the application of the optional method of accounting for rotable and temporary spare parts, and simplify the application of the de minimis safe harbor to materials and supplies. The regulations generally apply to taxable years beginning on or after January 1, 2014. However, taxpayers generally may choose to apply the final regulations to tax years beginning on or after January 1, 2012, or generally may choose to apply the 2011 temporary regulations to tax years beginning on or after January 1, 2012, and before January 1, 2014. The taxpayer makes the de minimis safe harbor election annually by including a statement the tax return for the year elected.
Business Credits
Small Employer Pension Plan Startup Cost Credit: For 2013, certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% of qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.
Credit for Employee Health Insurance Expenses of Small Employers: For tax years beginning after 2009, eligible small employers are allowed a credit for certain expenditures to provide health insurance coverage for their employees. Generally, employers with 10 or fewer full-time equivalent employees (FTEs) and an average annual per-employee wage of $25,000 or less are eligible for the full credit. The credit amount begins to phase out for employers with either 11 FTEs or an average annual per-employee wage of more than $25,000. The credit is phased out completely for employers with 25 or more FTEs or an average annual per-employee wage of $50,000 or more. The credit amount is 35% of certain contributions made to purchase health insurance. Beginning in 2014, the credit is only allowable if the health insurance is purchased through a SHOP Exchange and is only available for two consecutive taxable years.
Inventories
Subnormal Goods: You should check for subnormal goods in your inventory. Subnormal goods are goods that are unsalable at normal prices or unusable in the normal way due to damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange. If your business has subnormal inventory as of the end of 2013, you can take a deduction for any write-downs associated with that inventory provided you offer it for sale within 30 days of your inventory date. The inventory does not have to be sold within the 30-day timeframe.
Planning for 2014 Tax Increases and Potential Expiration of Tax Relief Provisions
S Corporation Built-In Gains Tax: An S corporation generally is not subject to tax; instead, it passes through its income or loss items to its shareholders, who are taxed on their pro-rata shares of the S corporation’s income. However, if a business that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate on all gains that were built in at the time of the election if the gains are recognized during a special holding period. For tax years beginning in 2009 and 2010, the special holding period was shortened from 10 years to seven years. It is shortened even more for tax years beginning in 2011, 2012 and 2013 to five years. Absent Congressional action, it appears that the special holding period will revert to 10 years in 2014. Therefore, it may be advisable for S corporations to dispose of their built-in gain property before the end of 2013.
100% Exclusion of Gain Attributable to Certain Small Business Stock: The incentive for individuals to acquire qualified small business stock is higher before the end of 2013. An individual ordinarily may exclude 50% of the gain from qualified small business stock that is held for at least five years (subject to a cap). “Qualified small business stock” is stock of a corporation the assets of which do not exceed $50 million when the stock is issued. The 50% exclusion of gain was increased to 75% for qualified small business stock acquired after February 17, 2009, and before September 28, 2010. The 2010 Small Business Jobs Act (SBJA) excluded 100% of the gain for qualified small business stock acquired or issued after September 27, 2010, and the American Taxpayer Relief Act of 2012 (2012 ATRA) extended the 100% exclusion to qualified small business stock acquired before January 1, 2014. In addition, the alternative minimum tax preference item attributable to the sale is eliminated. For stock acquired after December 31, 2014, only 50% of the gain from the sale/exchange of qualified small business stock held for more than 5 years is excluded from gross income (assuming no further Congressional action).
Qualifying Dividends: Qualified dividends received in 2011 and 2012 are subject to rates similar to the capital gains rates. For taxable years beginning on or after January 1, 2013, the 2012 ATRA made permanent the capital gain treatment of qualified dividend income for taxpayers below the newly reinstated 39.6% tax bracket, but raised the top capital gain rate for taxpayers in the 39.6% bracket to 20%. Qualified dividends are typically dividends from domestic and certain foreign corporations.
Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property: The rule that the basis of an S corporation shareholder’s stock is decreased by charitable contributions of property by the S corporation in an amount equal to the shareholder’s pro rata share of the adjusted basis of the contributed property expired for contributions made in taxable years beginning after December 31, 2011. The 2012 ATRA extended the special basis-adjustment rule (in part retroactively) through 2012 and 2013, to contributions made on or before December 31, 2013.
Employer-Provided Child Care Credit: For 2013, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures,” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility, and for resource and referral expenditures. Legislation in early 2013 made this credit permanent.
Employer Wage Credit for Employees in the Military: Some employers continue to pay all or a portion of the wages of employees who are called to active military service. If the employer has fewer than 50 employees and has a written plan for providing such differential wage payments, the employer is eligible for a credit. The amount of the credit is equal to 20% of the first $20,000 of differential wage payments to each employee for the taxable year. The credit expires after 2013.
Work Opportunity Credit: The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. The credit gives a business an expanded opportunity to employ new workers and to be eligible for a tax credit against the wages paid. The credit is determined based on first-year wages paid for employees hired on or before December 31, 2013.
Bonus Depreciation: Taxpayers can claim 50% bonus depreciation for assets placed in service in 2013. Bonus depreciation is also allowed for machinery and equipment used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials and qualified disaster assistance property. In 2014, bonus depreciation generally does not apply.
Health Care Planning
SHOP Exchanges: Beginning in 2014, the Small Business Health Options Program begins to allow certain small businesses to obtain health insurance for their employees through an exchange. The program is designed for employers with 50 or fewer full-time equivalent employees. Coverage must be offered to all full-time employees working 30 or more hours per week. Each state will offer its own SHOP marketplace. Self-employed persons with no employees cannot use the SHOP Exchange.
Reporting
Uncertain Tax Positions: The final Instructions for Schedule UTP state that a corporation must file Schedule UTP with its income tax return if it: (1) files Form 1120, Form 1120-F, From 1120-L, or Form 1120-PC; (2) has assets of $50,000,000 or more beginning with the 2012 tax year, and $10,000,000 or more beginning with the 2014 tax year (the threshold was $100,000,000 or more for tax years before 2012); (3) issued (or a related party issued) audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation’s tax year; and (4) has one or more tax positions that must be reported on Schedule UTP. A taxpayer that files a protective Form 1120, 1120-F, 1120-L, or 1120-PC and satisfies the conditions set forth above also must file Schedule UTP.
Unique Reference Identification Number: Forms 5471, 8858, and 8865 now contain a Unique Reference Identification number (URI) for each foreign entity with respect to which reporting is required. The URI will be used to track the foreign entity from year to year.
Electronic Deposits
Electronic Funds Transfer: As of January 1, 2011, a corporation must make its deposits of income tax withholding, FICA, FUTA, and corporate income tax by electronic funds transfer (EFT), including through the IRS’s Electronic Federal Tax Deposit System (EFTPS).
If you have any questions, please do not hesitate to contact me by clicking here. I would be happy to meet with you at your convenience to discuss the strategies and requirements outlined above. There is still time to implement these strategies to minimize your 2013 tax liability and plan for 2014.
Aug 28

A common question that comes up in my practice is ‘What is an S Corporation?’ So I decided to write a blog entry answering this question. Here is my S Corporation overview. The post covers the taxation of S corporations and their shareholders.

The term S Corporation is a tax term only. For state law purposes S corporations are just corporations. However, if your corporation elects to be taxed as a “S corporation” they are taxed much like partnerships for federal (and, in many cases, state) income tax purposes. There are several major federal income tax advantages of operating as an S corporation instead of as a regular C corporation. These advantages include:
  • A single level of tax. The income of an S corporation is generally subject to just one level of tax, at the shareholder level. In other words, the income generally is taxed only to the corporation’s shareholders. In contrast, a C corporation pays tax on its earnings, and its shareholders pay a second tax when corporate earnings are distributed to them in the form of dividends.
  • The availability of losses. Shareholders of an S corporation generally may deduct their share of the corporation’s net operating loss on their individual tax returns in the year the loss occurs. Losses of a C corporation, however, may offset only the corporation’s earnings. This pass-through of an S corporation’s losses to its shareholders makes the S corporation form particularly suitable for start-up businesses that are expected to generate losses during their initial stages.
  • Income splitting. S corporations can serve as excellent vehicles for splitting income among family members through gifts or sales of stock.
Although operating as an S corporation offers many significant tax benefits, there are also some significant disadvantages associated with electing S status. The primary disadvantages are:
  •  The exclusion for up to 100% of the gain on the sale of “qualified small business stock” does not apply to the sale of stock in an S corporation.
  • Fewer tax-free fringe benefits may be provided to shareholder-employees of S corporations than to shareholder-employees of C corporations.
  • Stock in an S corporation can only be transferred to eligible shareholders — individuals, estates, certain trusts, and certain pension plans and charitable organizations. An S corporation cannot have more than 100 shareholders, but married couples and other family members count as one shareholder. A nonresident alien may not be a shareholder. These limitations restrict the sources and amount of equity capital.
  • An S corporation may not issued preferred stock, since such stock will constitute a prohibited second class of stock. This limitation also may restrict the sources and amount of equity capital.
  • Estate planning for shareholders is generally more complicated when an S corporation is involved.
  • Tax rates applicable to individuals may be higher than the rates that would apply to a C corporation at the same income level.
  • Since 1997, employee stock ownership plans can be used, but some of their tax advantages are not available to S corporations.
Not all corporations may elect S status. The election is available only to qualifying “small business corporations.” A corporation must formally elect to be taxed as an S corporation by filing Form 2553, Election by a Small Business Corporation, with the IRS.
An S corporation’s taxable income must be computed in order to determine the items of income or loss to pass through to the shareholders. An S corporation’s taxable income generally is computed in the same manner as that of a partnership. Thus, items of income, gain, loss, deduction and credit, the separate treatment of which could affect the tax liability of a shareholder, must be passed through separately to each shareholder. The tax character of these items is determined at the corporate level, and they retain their character when passed through to the shareholders.
An S corporation that was once a C corporation may be subject to one or more of three separate taxes at the corporate level (e.g., the “built-in gains” tax). This rule is an exception to the general rule that S corporations are not subject to tax.
Items of income, gain, loss or deduction that pass through to a shareholder are reflected in the basis in his or her stock (and, in some cases, in debt, if any, that the corporation owes to the shareholder).
Once an S election is made, it applies for all succeeding years unless the election is terminated. If the election is terminated, S status generally cannot be re-elected for five years. An election can be terminated either intentionally or unintentionally. The election may terminate by revocation, by the corporation’s ceasing to satisfy the eligibility requirements for S status, or by the corporation’s failing a passive investment income test. For example, the election terminates if the S corporation’s stock is acquired by a nonqualified shareholder (e.g., a corporation) or if the number of shareholders exceeds the maximum permitted. The election terminates on the day the eligibility requirement is violated. If the termination is inadvertent, the IRS may allow the corporation to continue as an S corporation if the terminating event is corrected within a reasonable period of time.
If you would like more information on S corporations or having your entity taxed as an S corporation, contact Paul by clicking here.
May 21

The Internal Revenue Service has a program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

This is part of a larger “Fresh Start” initiative at the IRS to help taxpayers and businesses address their tax responsibilities.

The new Voluntary Classification Settlement Program (VCSP) is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees (instead of independent contractors or nonemployees). The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.

To be eligible, an applicant must:

  • Consistently have treated the workers in the past as nonemployees,
  • Have filed all required Forms 1099 for the workers for the previous three years
  • Not currently be under audit by the IRS
  • Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

Here is a video that was published by the IRS that discusses the program:  http://www.youtube.com/watch?v=85dae9YuoJg&noredirect=1

If your company needs assistance or representation regarding this program, please contact Paul by clicking here.

Apr 24

Here are some of the more important tax developments that have come out during the first three months of 2012. Most are documents from the Internal Revenue Service, but some are important cases and legislative changes you might want to be aware of for you or your business.

Payroll Tax Cut Full-Year Extension: On February 22, President Obama signed into law the Middle Class Tax Relief and Job Creation Act of 2012, extending the payroll tax cut for the remainder of 2012. The legislation maintains the FICA payroll tax rate for employees at the 4.2% rate that has been in place since January 2011, rather than the historical rate of 6.2%. Note that unless Congress decides to extend the lower rate again, the 4.2% rate expires December 31, 2012. The extension does not affect the 10.4% SECA rate, as that was already in place through 2012.
Business Automobile Depreciation Limits: In Rev. Proc. 2012-23, the IRS provided inflation-adjusted automobile (including trucks and vans) depreciation deduction limitations and automobile (including trucks and vans) lessee inclusion amounts for 2012, including automobiles, cars and trucks eligible for first-year additional depreciation.
Deduction for Mortgage Interest: In an IRS Chief Counsel Memorandum, CCA 201201017, the IRS advised that any reasonable method, including the exact and simplified methods described in temporary regulations to §163, the method provided in Publication 936, Home Mortgage Interest Deduction, or a reasonable approximation of those methods, may be used until final regulations are issued specifically addressing allocations of interest on part of acquisition and/or home equity indebtedness that exceeds qualified residence interest limitations. In Sophy v. Comr., the U.S. Tax Court held that unmarried taxpayers who owned homes in California as joint tenants may not deduct more than a proportionate share of interest on $1 million of acquisition indebtedness and $100,000 in home equity indebtedness. The Tax Court determined that the debt must be determined per residence rather than per taxpayer. In the case, two unmarried taxpayers owned two homes with mortgages totalling more than $2.2 million. The each attempted to take an interest deduction on $1.1 million of debt per person.
Electronic Filing of Schedules K-1: Certain entities, such as partnerships, are required to annually file a Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., with the IRS and provide a copy to their partners. In Rev. Proc. 2012-17, the IRS set forth procedures under which a partnership (including an electing large partnership, as defined in §775) that furnishes Schedules K-1 (Form 1065) to its partners electronically will be treated as satisfying the requirements of §6031(b). Prior to the issuance of the new revenue procedure, there was no specific guidance as to whether the furnishing of Schedules K-1 electronically met these requirements. Partnerships must receive the partner’s consent before providing the K-1 electronically, rather than on paper.
S Corporation Dividends: In David E. Watson PC v. U.S., the Eighth Circuit Court of Appeals, in an issue of first impression, held that some of the purported dividend payments that an S corporation made to its sole shareholder constituted wages subject to FICA. The court determined that the characterization of funds distributed by an S corporation to its shareholder-employees turns on an analysis of whether the payments were made as compensation for service, not on the intent of the corporation in making the payments. The court explained that while the concept of “reasonable compensation” is generally applied to the realm of income taxes, the concept is equally applicable to FICA tax cases.
Extension of Deadline to Make Portability Election: Section 2010(c) allows the estate of a decedent who is survived by a spouse to make a portability election to permit the surviving spouse to apply the decedent’s unused exclusion to the surviving spouse’s own transfers during life and at death. The portability election may be made only by the estates of decedents dying after December 31, 2010. Section 6075(a) makes the due date for filing an estate tax return nine months after the date of the decedent’s death. Section 6081(a) provides that IRS may grant a reasonable extension of time for filing any return and that, except in the case of taxpayers who are abroad, no such extension may be for more than six months. In Notice 2011-82, the IRS provided procedures to make the portability election. For estates of decedents dying in early 2011 that had missed the due date for filing Form 706 and Form 4768, the IRS granted, for the purpose of make a portability election pursuant to §2010(c)(5)(A), a six-month extension of time for filing Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. In Notice 2012-21, the IRS stated that the extension applies when the executor of a qualifying estate did not file a Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, within nine months after the decedent’s date of death, and therefore the estate did not receive the benefit of the automatic six-month extension. A qualifying estate is an estate: (1) the decedent is survived by a spouse; (2) the decedent’s date of death is after December 31, 2010, and before July 1, 2011; and (3) the fair market value of the decedent’s gross estate does not exceed $5,000,000.
Repeal of Special Corporate Estimated Tax Payment Rules: The Middle Class Tax Relief and Job Creation Act of 2012, enacted Feb. 22, repealed the special estimated tax payment rules for corporations with assets of at least $1 billion (determined as of the end of the preceding taxable year) that would have impacted payments due in July, August or September 2012, 2014, 2015, 2016 and 2019, respectively. The changes were made over numerous pieces of legislation that increased the required payments. Thus, such corporations should determine their estimated tax payment as if the special rules had never been enacted.
Splitter Regulations: On February 14, the IRS published in the Federal Register foreign tax credit regulations concerning who is the taxpayer who may claim the credit when the foreign law differs from the U.S. law in viewing the entity with the right to the income as fiscally transparent (i.e., merely a representative of its owners or members) or as a required member of a combined income regime (such as in the case of a disregarded entity or a consolidated income group). The new rules generally retain the long-standing legal liability standard, but provide that the credit is to follow the income in many of these situations regardless of who pays the tax or has the tax obligation. On the same day, the IRS published temporary regulations under a statutory change in 2010 designed to prevent taxpayers from splitting the foreign income from the creditable foreign taxes so as to claim the latter and defer the former. The rules for these cases generally suspend the credit until the income is recognized for U.S. purposes.
FATCA Proposed Regulations: FATCA, which was part of the 2010 HIRE Act, enacted chapter 4 (§§1471- 1474), which in turn imposes 30% withholding on “withholdable payments” to foreign financial entities (FFIs) and certain nonfinancial foreign entities (NFFEs) unless they report U.S. account owner information to the IRS. Withholdable payments are basically fixed or determinable annual or periodic (FDAP) gains and the gross proceeds of the sale or disposition of FDAP income-producing assets. With the issuance of the proposed regulations on February 8, there is no longer any doubt that the objective of FATCA is information reporting, not withholding — withholding is simply the “incentive” to report.
In general, the proposed regulations, which build on earlier preliminary guidance aim to reduce FATCA’s compliance burden and to provide (through transitional rules) ample time for affected entities to comply with chapter 4. The proposed regulations establish a timetable for implementation (including grandfathered treatment for pre-existing obligations), exempt many classes of entities that would otherwise be subject to FATCA, set out payee/beneficial owner identification and documentation procedures, and provide FFI due diligence procedures. The proposed regulations also signal the IRS’s intention to coordinate chapter 3 (§§1441-1446) and chapter 4 so as to avoid duplicate reporting.
The same day that the proposed regulations were issued, Treasury issued a joint statement with five countries (the UK, France, Italy, Spain, and Germany). The joint statement would introduce a framework that would let banks send information on their U.S. accounts to their own governments, which then would share the information with the IRS. The framework would not provide country-by-country blanket exemptions; rather, it would provide an alternative mode of FATCA compliance by adjusting local (i.e., foreign) law restrictions to allow for the automatic exchange of information between and/or among participating governments. (It’s not yet clear if the framework would be implemented multilaterally or bilaterally.)
Offshore Voluntary Disclosure Initiative: On January 16, the IRS announced that it is reopening its special program to allow taxpayers to disclose their offshore assets to the government for a third time. According to the IRS, the program will be open for an indefinite period until otherwise announced. A few key differences in this program from 2011, include its open-ended structure and a slightly higher top penalty of 27.5%, up from 25%. But the program does retain a feature that allows some smaller taxpayers to be eligible for a 5% penalty or a 12.5% penalty. To participate, taxpayers must file all original and amended tax returns and include payment for back taxes and interest for up to eight years, as well as paying accuracy-related and/or delinquency penalties.
Foreign Financial Accounts Reporting: Beginning in 2012, virtually every U.S. individual (including residents, certain nonresident aliens, among others) who files a federal return for the year and had an interest in an applicable account/asset valued over $50,000 on the last day of the year or $75,000 at any point during the year, must file Form 8938, Statement of Specified Foreign Financial Assets. Reporting thresholds vary based on filing status. The form must be filed annually.
Proposed Withdrawal of 2007 Coordinated Issue Paper on Cost Sharing: On January 19, IRS Transfer Pricing Director Sam Maruca, who has said in the past that coordinated issue papers are not the best way to disseminate guidance to the field, announced the proposed withdrawal of a 2007 coordinated issue paper (CIP) on cost sharing. Maruca said the CIP illustrates the hazards of trying to develop a blueprint for transfer pricing cases. “It has been very risky—indeed, has backfired on us—to think we can issue blanket advice in this area,” he said. Following the release of the paper in September 2007, practitioners complained that it was an attempt to retroactively apply the income method, which was not introduced until 2005, when the IRS issued its proposed cost sharing regulations. The issue paper warned auditors to be skeptical of taxpayer attempts to apply the comparable uncontrolled price and residual profit split methods to cost sharing transactions, saying the “discounted cash flow”—an unspecified method in the 1996 regulations, renamed the income method in the proposed regulations—likely was more appropriate.
Merger of the IRS’s Advance Pricing Agreement and Competent Authority Functions. Maruca said the new Advance Pricing and Mutual Agreement Program was up and running February 27. The new structure puts an end to the handoff between the APA Program and the U.S. Competent Authority in bilateral cases, which represent the majority of APAs. Under the old structure, the APA Program, working with the taxpayer, developed a negotiating position in a case and submitted it to Competent Authority, which then undertook the negotiations with the foreign authorities. Now, the same individual will be responsible for both developing and negotiating the position. This is the structure employed by most U.S. trading partners.
Final Rules, Sample Language for Health Plan Summary Benefit Disclosures: Under the Public Health Service Act (PHSA) §2715, group health plans and health insurance issuers that offer group or individual health insurance coverage must provide a summary of benefits and coverage (SBC), as well as a uniform glossary of insurance-related and medical terms, to the individuals they cover. The IRS, HHS and EBSA, who all share rule-making authority under PHSA, issued final regulations that change some of the content requirements that were included in the proposed regulations issued in August 2011. Specifically, the IRS eliminated provisions that would have required premiums (or cost of coverage information for self-insured plans) to be included in SBCs. The IRS indicated that premium information may be too complex to be conveyed in an SBC and is not required by statute. The IRS also modified the final regulations to require SBCs to include an internet address where an individual may review the uniform glossary, a contact phone number to obtain a paper copy of the uniform glossary, and a disclosure that paper copies of the uniform glossary are available. The final regulations apply for disclosures to participants and beneficiaries who enroll or re-enroll in group health coverage through an open enrollment period (including re-enrollees and late enrollees) beginning on the first day of the first open enrollment period that begins on or after September 23, 2012. For disclosures to participants and beneficiaries who enroll other than through an open enrollment period (including individuals who are newly eligible for coverage and special enrollees), the final regulations apply beginning on the first day of the first plan year that begins on or after September 23, 2012. For disclosures to plans, and to individuals and dependents in the individual market, the regulations apply to health insurance issuers beginning on September 23, 2012.
Final Rules on ERISA 408(b)(2) Service-Provider Disclosure: Under final rules issued by the Department of Labor’s Employment Benefits Security Administration February 3, covered service providers to ERISA-covered defined benefit and defined contribution plans must provide to plan fiduciaries the information required to: (1) assess reasonableness of the total compensation, both direct and indirect, that a covered service provider receives from the contract; (2) identify potential conflicts of interest; and (3) satisfy reporting and disclosure requirements under Title I of ERISA. “Covered service providers” include ERISA fiduciary service providers, investment advisers registered under federal or state law, brokers, and recordkeepers. The rule only applies to service providers that reasonably expect to earn $1,000 or more in total compensation under a service contract. The rule does not apply to simplified employee pension plans, savings investment match plans for employees of small employers, individual retirement accounts, certain §403(b) annuity contracts and custodial accounts, or employee welfare plans.
If you have any questions about any of the topics discussed here. Click here to contact Paul.

 

Feb 10
The purpose of this post is to discuss the new reporting requirements under Internal Revenue Code (IRC) §6050W for payment settlement entities (PSEs). Generally, PSEs, as entities under contractual obligation to make payment in settlement of payment card (credit card/debit card/gift card/credit account) transactions and third-party network transactions, are responsible for reporting such payments on IRS Form 1099-K, Merchant Card and Third Party Network Payments. The reporting requirements only apply for third-party network transactions when gross payments to any participating payee exceed $20,000, and more than 200 transactions occurred with that payee.
Generally, the PSE submits the instructions to transfer funds to payees’ accounts and thus must file Form 1099-K; however, if you contract with a third party, such as an electronic payment facilitator, to settle reportable transactions and to submit instructions to transfer funds to the participating payee’s account to settle reportable payment transactions, the third party must report by filing Form 1099-K.
Due Dates
For payments made in 2011, Copy A of each Form 1099-K is due to the IRS by February 28, 2012 (April 2 if filed electronically). In subsequent years, the filing dates are February 28 (paper) and March 31 (electronic). The Form 1099-K may be filed electronically after January 4 through the FIRE (Filing Information Returns Electronically) option. There is no fill-in form option.
Copy B of each Form 1099-K is due to the payee by January 31. This copy also may be furnished to the recipient electronically if certain regulatory requirements are satisfied. Please contact me if you wish to discuss this option. You also may furnish this statement on a website, subject to certain restrictions.
Required Information
You must provide your name, address, and federal tax identification number (TIN) in the boxes for filer’s information. You also must provide each payee’s name, address and TIN. You may verify payee TINs on the IRS website. Submissions under these reporting requirements are subject to the IRS Taxpayer Identification Number Matching Program to ensure your Forms 1099-K include the correct TIN. In addition, if your organization has an account number for each payee, it also may be listed on Form 1099-K. If your organization has multiple accounts for a single recipient and more than one Form 1099-K will be filed, you must provide account numbers.
The gross dollar amount for the total reportable merchant card/third party network payment transactions for the calendar year must be reported in Box 1 of Form 1099-K. You must report this amount disregarding any adjustment for credits, cash equivalents, discount amounts, fees, refunds or other amounts. Further, you also must report this amount on a monthly basis in Boxes 5a through 5l.
You must report the four-digit Merchant Category Code (MCC) in Box 2 (third-party settlement organizations need not complete Box 2). You must assign to each payee an MCC that most closely corresponds to the description of the payee’s business. If any recipient has receipts classified under more than one MCC, you may either file separate Forms 1099-K for each MCC, or file a single Form 1099-K reporting total gross receipts under the MCC that corresponds to the largest portion of the total gross receipts.
Penalties
The entity responsible for filing Form 1099-K (i.e., the entity that submits instructions to transfer funds) may contract with a third party to prepare and file Form 1099-K. However, the responsible entity is liable for any applicable penalties (at present, $100 per return that is late-filed or filed with incomplete or incorrect information).
2012 Error Relief
The IRS provided transitional relief, under IRS Notice 2011-89, for inaccurate data submitted on Form 1099-Ks filed in 2012, for payments made in calendar year 2011. The filer must make a good faith effort to file accurately and furnish the required accompanying payee statements. The IRS granted temporary relief from the penalties discussed above.
Aug 16
This post discusses how a corporation may make an election to be treated as an S corporation for federal tax purposes. A corporation may become an S corporation if:
(1) it meets the requirements of S corporation status;
(2) all its shareholders consent to S corporation status;
(3) it files Form 2553, Election by a Small Business Corporation, to indicate it chooses S corporation status; and
(4) it uses a permitted tax year, or elects to use a tax year other than a permitted tax year (explained below) .
All of these requirements are discussed further below.
Requirements of an S Corporation
To qualify for S corporation status, a corporation must meet all the following requirements:
(1) It must be a domestic corporation. In other words, it must be a corporation that is either organized in the United States or organized under federal or state law.
(2) It must have only one class of stock.
(3) Generally, it must have no more than 100 shareholders.
(4) It must have as shareholders only individuals, estates, and certain trusts; certain pension plans and certain charities may also be shareholders.
(5) All of its shareholders must be either citizens or residents of the United States. Nonresident aliens may not be shareholders.
One Class of Stock
“One class of stock” generally means that the outstanding shares of the corporation must be identical as to the rights of the holders in the profits and assets of the corporation. Stock may have differences in voting rights and still be considered one class of stock, if all other rights are identical. A stock purchase agreement executed between an S corporation and its shareholders that does not affect the shareholder’s rights in the corporation’s profits and assets will not create a second class of stock. Debt obligations of a corporation that are actually contributions of equity capital may be treated as a second class of stock. However, straight debt will not be considered a second class of stock. The term “straight debt” means any written unconditional promise to pay a fixed amount on demand or on a specified date, if:
(1) the interest rate and interest payment dates are not contingent on profits, the borrower’s discretion, or similar facts;
(2) the debt cannot be converted, directly or indirectly, into stock; and
(3) the creditor is an individual, estate, or trust eligible to hold stock in an S corporation; banks can also hold straight debt.

Shareholder Consents
The corporation’s election of S corporation status is valid only if all shareholders consent to the election. Once made, the S election may be revoked only if shareholders who collectively own more than 50% of the outstanding shares of the corporation’s stock consent to the revocation. Shareholders may consent by providing the required information on Form 2553 and signing in the appropriate place on that form. All shareholders must consent at the time the Form 2553 is filed. If the consent is filed after the beginning of the year for which it is to be effective, all shareholders in the corporation who held stock on any day in the tax year before the date the Form 2553 is filed must also consent.
Form 2553
The corporation must qualify as an S corporation when it files its Form 2553. The Form 2553 should be filed with the IRS Service Center where the S corporation will file its income tax return. The election of S corporation status applies to a particular tax year if the Form 2553 is filed:
(1) any time during the previous tax year; or
(2) by the 15th day of the third month of the tax year.
A “late” or invalid election can cause adverse tax consequences. Extreme care should be exercised to ensure that the Form 2553 is accurately completed and filed in a timely manner. Although the IRS may treat a late or invalid election as timely and valid if reasonable cause is shown, it is far preferable to ensure that the requirements are met.

Tax Year
A permitted tax year is a calendar year or any other accounting period for which the corporation establishes a business purpose to the IRS’s satisfaction. In addition, an S corporation may elect under §444 of the Internal Revenue Code to have a tax year other than a permitted tax year. A corporation electing S corporation status does not need the IRS’s approval to choose a calendar year as its tax year. An electing S corporation should use Form 2553 to request a tax year other than a calendar year or to make the §444 election.

If your corporation needs assistance making the election to be taxed as an S corporation contact Paul by clicking here.

Jun 19
Many business owners purchase vehicles that are used extensively for business purposes and need to know to what extent this business use is deductible from their income. Taxpayers who use a passenger automobile, including “luxury” automobiles, in the pursuit of business or in an income-producing activity can deduct certain costs related to its acquisition and maintenance. The deductible items include gas, oil, tolls, parking fees, insurance, and depreciation (if you own the car) or rent (if you lease the car). All of the expenses must be allocated between business use and nondeductible personal use. Use of an automobile for commuting to and from work is personal and expenses related to commuting are nondeductible. You can deduct actual expenses incurred as a result of the business use or you can use the standard mileage rate.

Instead of figuring actual expenses, you can use the standard mileage rate of 51 cents per mile for travel during 2011. The standard mileage deduction is in lieu of deducting operating and fixed costs of the automobile. Depreciation is a component of the standard mileage rate, therefore, the basis in the automobile must be reduced by the depreciation allowed. However, if you use the standard mileage deduction, you can still deduct parking fees, tolls, interest relating to the automobile’s purchase, and state and local taxes. Up to four cars used simultaneously can be computed using the standard mileage rate.

If you want to use the standard mileage rate for a car in any year, you must choose to use it in the first year you place the car in service in your business. After the first year you can switch to deducting actual expenses.

If you choose to deduct actual expenses, you can deduct such items as oil, gas, insurance, depreciation, etc. However, there are special rules that apply if you use your car 50% or less in your business. Generally, you must use a car more than 50% for business to qualify for the §179 deduction (election to treat a portion of the cost of the car as an expense-see below) and there is a limit on the depreciation deduction. Using your car as an employee is treated as business use only if that use is for the convenience of your employer and required as a condition of your employment.

Generally, the cost of an automobile is a capital expenditure; however, if you use the automobile more than 50% for business purposes, you can elect to treat a portion of the cost, subject to yearly limits, as an expense in the year the automobile is placed in service. The yearly limit allowed is determined by the year the automobile is placed in service and the percentage of business use. A special rule for 2008, 2009, and 2010 allows an additional 50% first-year depreciation deduction and an $8,000 increase to the annual limitation amount.

For example, if an automobile is placed in service in 2010, the expense deduction and the depreciation deduction cannot be more than $11,060 for the first year (the placed-in-service year); $4,900 for the second year; $2,950 for the third year, and $1,775 for any year thereafter. This limit is reduced if the taxpayer uses the automobile more than 50%, but less than 100%, for business use.

Vans and trucks placed in service in 2010 are subject to a higher limitation than passenger automobiles: $11,160 for the first year; $5,100 for the second year; $3,050 for the third year; and $1,875 for each succeeding year. Vans and trucks placed in service in 2009 are subject to the following limitations: $11,060 for the first year; $4,900 for the second year; $2,950 for the third year; and $1,775 for each succeeding year.
Trucks used in construction and other certain activities may not be subject to these limitations. Large SUVs are also subject to different rules as well. If you would like more information about auto, car, and truck expenses in your business, click here to contact Paul to discuss the matter further.
May 11
For more than a year, corporations have known that they soon would be subject to 1099 reporting requirements under an expansion of the rules in the health care reform law. The law requires businesses to file an information return whenever they pay a vendor more than $600 for goods in a single year. This requirement is effective for payments made after December 31, 2011.
Additionally, the 1099 reporting requirement was expanded in September 2010 to require real estate landlords to file 1099s to report payments made to service providers during the year. This requires recipients of real estate rental income who make payments of $600 or more per year to a service provider, such as a plumber, painter, accountant, or property manager, to issue a Form 1099 to the provider. This requirement became effective for payments made after December 31, 2010.
With the enactment, both of these reporting requirements are repealed as if they never became law. (To pay for the repeal, new limits are imposed on the amounts required for repayment of advance premium assistance tax credits for health insurance under § 36B.)
If you have any questions about what the current reporting requirements are for Form 1099, click here to contact Paul.
Mar 24
In light of the enactment of new taxes on the investment income and wages of highly compensated employees to pay for health care reform, you may want to reconsider establishing a qualified retirement plan to reduce this future tax burden.
It is unclear if the current Congress will attempt to undo the Health Care Reform laws, but for now, beginning in 2013, the Patient Protection and Affordable Care Act of 2010 (P.L. 111-148) and the Health Care and Education Reconciliation Act (P.L. 111-152) impose a new Medicare tax on individuals equal to the lesser of 3.8% of net investment income or any excess of modified adjusted gross income over $250,000 for taxpayers filing joint returns, $125,000 for married taxpayers filing separately, and $200,000 for all other taxpayers. The legislation also raises the hospital insurance tax on wages and self-employment income in excess of $200,000 ($250,000 for a joint return) by 0.9%.
You can shield from additional taxation investment returns based on distributions from retirement plans. For this purpose, net investment income includes gross income from interest, dividends, annuities, royalties and rents (other than from a trade or business), income from passive activities or from trading in financial instruments or commodities. Importantly, under the health care legislation, net investment income does not include distributions from qualified retirement plans, including those from tax-qualified pension, profit-sharing, 401(k) and annuity plans, as well as traditional and Roth IRAs.

If you have not yet set up a qualified retirement plan, it may now be more worthwhile to explore doing so. Please click here to contact Paul to discuss this further.

Jan 18
On December 17, 2010, the president signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This Act, in essence, is a two-year extension of the 2001/2003 Bush-era tax cuts. The Act also incorporated many business extensions of the so-called “annual extenders.” The following is a list of the provisions that may affect your 2011, and in some cases, 2010 and 2012 tax liability.
BUSINESS INVESTMENT INCENTIVES
Bonus Depreciation. The Act extends the 50% bonus depreciation provision for qualified property acquired after December 31, 2007, and before January 1, 2013. In addition, it allows 100% bonus depreciation for property acquired and placed in service after September 8, 2010, and before January 1, 2012. Thus, taxpayers can claim a 100% depreciation deduction for property acquired and placed in service in the latter third of 2010, all of 2011 (and 2012, for certain property). Property placed in service during 2012 (2013 for certain property) would be eligible for 50% bonus depreciation. The Act also extends the provision allowing corporate taxpayers to elect to accelerate the AMT and research credits in lieu of bonus depreciation to the 2011 and 2012 taxable years.
Other special rules apply to this new round of extension property, labeled “round 2 extension property.” If you plan on continuing or increasing your business asset investments, we should sit down to discuss all the procedures to qualify for the maximum depreciation deduction allowable.
Small Business Expensing. Under prior legislation, for taxable years beginning in 2010 and 2011, small businesses may elect to expense up to $500,000 of capital investment, with the phase out beginning at $2,000,000. The limits were scheduled to be lowered to $25,000 with a $200,000 limitation for 2012. Under the new law, for 2012, such amount is raised to $125,000, with a phase out threshold of $500,000 (both figures to be adjusted for inflation). A $25,000 maximum and $200,000 phase out threshold will apply for tax years beginning after 2012 and will not be adjusted for inflation.
In view of the 100% bonus depreciation property acquired and placed in service from September 9, 2010, through December 31, 2011, for any property that you acquired or may acquire in excess of the expensing limitations during that period, you should consider whether it would be advantageous to claim 100% bonus depreciation or to accelerate AMT or research credits, rather than electing to expense the cost. Please contact me with the specific property acquired and its cost so that we can determine which alternative would yield the greatest tax benefit for your particular circumstances.
TEMPORARY EMPLOYEE PAYROLL TAX CUT
For 2011 only, the 2010 TRA reduces the Social Security (OASDI) tax rate on employees to 4.2% (from 6.2%) and reduces the self-employment tax (SECA) rate to 10.4% (from 12.4%). The employer OASDI tax rate stays at 6.2%. Note that the 2010 TRA does not reduce the OASDI contribution base, which is $106,800 for 2011. Thus, the maximum OASDI tax in 2011 for employees is $4,485.60.
This rate reduction is not taken into account in determining the SECA tax deduction allowed for determining net earnings from self employment. As a result, the deduction for 2011 remains 7.65% of self-employment income (determined without regard to the deduction). For federal laws other than the tax Code, the rate of tax in effect under §3101(a) is determined without regard to the reduction in that rate under the 2010 TRA. Also, the income tax deduction allowed under for taxable years beginning in 2011 is determined using 59.6% of the OASDI tax paid, plus one half of the HI tax paid.
EXTENSION OF CERTAIN EXPIRING PROVISIONS

Energy Incentives
Incentives for Biodiesel and Renewable Diesel. The Act extends, from December 31, 2009, the credits for biodiesel, renewable diesel used as fuel, and biodiesel mixture, and the payments for non-taxable biodiesel mixture, for fuel sold or used through December 31, 2011. The Act also provides that biodiesel mixture credits properly determined during 2010 will be allowed, and any refunds or payments attributable to those credits will be made according to IRS guidance.
Credit for Refined Coal Facilities. The Act extends, from December 31, 2009, the renewable electricity production credit for facilities producing refined coal that are placed in service before January 1, 2012.
New Energy Efficient Home Credit. The Act extends, from December 31, 2009, the new energy efficient home credit for qualified homes acquired from an eligible contractor on or before December 31, 2011.
Excise Tax Credits and Outlay Payments for Alternative Fuel and Alternative Fuel Mixtures. The Act allows credits for alternative fuel and alternative fuel mixtures (excepting, in both cases, liquefied hydrogen) and payments for non-taxable alternative fuel and alternative fuel mixtures (excepting, in both cases, liquefied hydrogen) to such fuels sold or used on or before December 31, 2011. The Act also continues to exclude black liquor from credit eligibility. Finally, the Act provides that credits for alternative fuel or alternative fuel mixtures properly determined during 2010 will be allowed, and refunds or payments attributable to those credits will be made according to IRS guidance.
Suspension of Limitation on Percentage Depletion for Oil and Gas from Marginal Wells. The Act extends the temporary suspension of the taxable income limit on percentage depletion for oil and gas from marginal wells to depletion determined for taxable years beginning before January 1, 2012.
Extension of Grants for Specified Energy Property in Lieu of Tax Credits. The Act extends the American Recovery and Reinvestment Act of 2009 grants for specified energy property in lieu of tax credits through 2011.
Extension of Provisions Related to Alcohol Used as Fuel. The Act extends the alcohol fuels credit to any sale or use of such fuels for any period on or before December 31, 2011. However, the credit does not apply to any period before January 1, 2012, during which time the Highway Trust Fund gasoline excise tax financing rates are 4.3 cents per gallon. In addition, the Act extends the reduced credit for ethanol blenders through 2011. The Act also provides that the payments for non-taxable alcohol fuel mixtures apply to such fuel sold or used on or before 2011.
Energy Efficient Appliance Credit. The Act extends the energy efficient appliance credit for qualifying dishwashers, clothes washers and refrigerators manufactured in calendar year 2011. The Act decreases the aggregate credit amount allowed to $25,000,000, less the credit amount allowed in all prior tax years. Also, the Act excludes the most efficient refrigerators and front-loading clothes washers from the aggregate credit amount.
Alternative Fuel Vehicle Refueling Property. The Act extends, from December 31, 2010, the alternative fuel vehicle refueling property credit to any non-hydrogen related property placed in service on or before December 31, 2011.
Business Tax Relief
Research Credit. Although the research credit expired on December 31, 2009, the Act extends the credit for amounts paid or incurred on or before December 31, 2011. The December 31, 2008 termination date for the alternative incremental credit election remains unchanged.
Indian Employment Credit. The Act extends, from December 31, 2009, the Indian employment credit to tax years beginning on or before December 31, 2011.
New Markets Tax Credit. The Act sets a new national designated investment limitation for the new markets tax credit of $3.5 billion in 2010 and 2011, and permits unused credits to be carried over to 2016.
Railroad Track Maintenance Credit. The Act extends, from December 31, 2010, the railroad track maintenance credit for 50% of qualified railroad track maintenance expenditures paid or incurred in taxable years beginning before January 1, 2012.
Mine Rescue Team Training Credit. The Act extends, from December 31, 2009, the mine rescue team training credit of 20% of the cost of training rescue team members to tax years beginning before January 1, 2012.
Employer Wage Credit for Employees Who Are Active Duty Members of the Uniformed Services. The Act extends, from December 31, 2009, the activated military reservist wage payment credit of 20% of differential wage payments made to activated military reservists for payments made before January 1, 2012.
15-Year Straight-Line Cost Recovery for Qualified Leasehold Improvements, Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements. The Act extends, from December 31, 2009, the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements to qualified property placed in service before 2012.
7-Year Recovery Period for Motorsports Entertainment Complexes. The Act extends, from December 31, 2009, the 7-year recovery period for motorsports entertainment complexes to property placed in service before 2012.
Accelerated Depreciation for Business Property on an Indian Reservation. The Act extends, from December 31, 2009, the accelerated depreciation rules for business property located on an Indian reservation to property placed in service before 2012.
Charitable Deduction for Contributions of Food Inventory. The Act extends the special rule for charitable deductions for contributions of food inventory made from the taxpayer’s trade or business that expired on December 31, 2009, to contributions made on or before December 31, 2011.
Charitable Deduction for Contributions of Book Inventories to Public Schools. The Act extends the special rule for charitable deductions for contributions of book inventory to public schools that expired on December 31, 2009, to contributions on or before December 31, 2011.
Charitable Deduction for Corporate Contributions of Computer Inventory for Educational Purposes. The Act extends the special rule for charitable deductions for contributions of computer technology and equipment for educational purposes that expired on December 31, 2009, to contributions made on or before December 31, 2011.
Election to Expense Mine Safety Equipment. The Act extends, from December 31, 2009, the election to expense mine safety equipment, generally available for 50% of the cost of any qualified advanced mine safety equipment property, to property placed in service before 2012.
Special Expensing Rules for Certain Film and Television Productions. The Act extends, from December 31, 2009, the special expensing rules for certain film and television producers to qualified television or film production costs beginning before 2012. The deduction is generally applicable to the first $15 million of qualified television or film production costs.
Expensing of Environmental Remedial Costs. The Act extends, from December 31, 2009, the election to deduct environmental remediation costs in lieu of capitalization through December 31, 2011.
Deduction Allowable with Respect to Income Attributable to Domestic Production Activities of Puerto Rico. The Act extends the special domestic production activities rules for Puerto Rico to apply for the first six taxable years of a taxpayer beginning after December 31, 2005, and before January 1, 2012.
Modification of Tax Treatment of Certain Payments to Controlling Exempt Organizations. Under §512(b)(13)(E), certain payments made to an exempt organization by a controlled organization must be treated as unrelated business income. For payments received or accrued before January 1, 2010, the amount taken into income was limited to “excess payments” as determined under §482. The Act extends the excess payments rule to include payments received or accrued before January 1, 2012.
Treatment of Certain Dividends of Regulated Investment Companies. The Act extends, from December 31, 2009, the exemption from the 30% withholding tax and for qualified interest-related dividends and short-term capital gain dividends received by a foreign person from a regulated investment company (RIC) through December 31, 2011.
RIC Qualified Investment Entity Treatment Under FIRPTA. The Act extends, from December 31, 2009, the inclusion of a regulated investment company (RIC) within the definition of a “qualified investment entity” for purposes of determining whether a distribution from a RIC is subject to FIRPTA tax and withholding pursuant to §§897 and 1445 through December 31, 2011. The extension, however, does not apply to the withholding requirement for any payment made before the December 17, 2010 enactment date of the Act. However, a RIC that withheld and remitted tax on post-2009 distributions before the enactment date is not held liable to the distributee for such amounts.
Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property. Section 1367(a)(2) provides that an S corporation shareholder’s §1367(a)(2)(B) basis reduction resulting from the corporation’s charitable contribution of property equaled the shareholder’s pro rata share of the adjusted basis of the contributed property. The Act extends this special rule from December 31, 2009, to contributions made on or before December 31, 2011.
Empowerment Zone Tax Incentives. The Act extends, from 2009, the designation of certain economically depressed census tracts as Empowerment Zones, within which businesses are eligible for special tax incentives, through 2011.
Tax Incentives for Investment in the District of Columbia. The Act extends for two years (through 2011) the designation of certain economically depressed census tracts within the District of Columbia as the District of Columbia Enterprise Zone, within which businesses are eligible for special tax incentives.
Work Opportunity Credit. Businesses are allowed to claim a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to new hires of one of nine targeted groups. While scheduled to expire August 31, 2011, the Act extends the credit through December 31, 2011, effective for individuals who begin work for an employer after December 17, 2010.
Exclusion of 100 Percent of Gain on Certain Small Business Stock. The Act extends the 100% exclusion of the gain from the sale of qualifying small business stock to stock that is acquired before January 1, 2012, and held for more than five years.
Qualified Zone Academy Bonds. Qualified zone academy bonds (QZABs) are tax credit bonds which offer the holder a tax credit instead of interest. They are used to finance renovations, equipment and course material purchases, and teacher training at a qualified zone academy. A qualified zone academy is generally a public school or academic program within that school located in an enterprise community or empowerment zone). The program is designed to work with the business community to increase graduation and employment rates. The Act extends the QZAB program by providing an additional $400 million for 2011. The Act also repeals the prior law direct subsidy feature of QZABs.
GO Zone Disaster Relief
Increase in Rehabilitation Credit. The Act extends, from December 31, 2009, the increased rehabilitation credit for qualified rehabilitation buildings and certified historic structures located in the Gulf Opportunity Zone, for amounts paid or incurred on or before December 31, 2011.
Low-Income Housing Credit Rules for Buildings in GO Zones. The Act extends the placed in service date for qualification of additional allocations of low-income housing credits made in 2006, 2007, and 2008 for buildings located in the GO Zone, the Rita GO Zone, or the Wilma GO Zone to buildings placed in service before January 1, 2012.
Bonus Depreciation Deduction Applicable to the GO Zone. The Act extends, from December 31, 2009, the additional depreciation deduction for Gulf Opportunity Zone extension property for property be placed in service by December 31, 2011.

As you can see, the Act covers many, but not all, of the various proposed tax provisions important to the business community. Please contact me so that I can review your particular circumstances in order to maximize your tax benefits for 2010, as well as plan for 2011, and beyond.

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