Paul Jones | Utah Attorney » Business

Tax Law Developments in the First Quarter of 2012

paul — Tue, 24 Apr 2012 15:33:05 +0000

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.

Form 1099-K: How does this affect my business?

paul — Fri, 10 Feb 2012 16:17:05 +0000

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.

Please click here to contact Paul for assistance in evaluating the applicability of these reporting requirements to your organization and in creating an effective reporting procedure to ensure compliance.

Making the S Corporation Election

paul — Tue, 16 Aug 2011 14:41:34 +0000

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.

Auto, Car, and Truck Business Expenses

paul — Sun, 19 Jun 2011 20:42:29 +0000

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.

Form 1099 Reporting Requirements Repealed

paul — Wed, 11 May 2011 13:31:48 +0000

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.

Tax Advantages of Qualified Plans for Business Owners Under Health Care Reform

paul — Thu, 24 Mar 2011 17:42:04 +0000

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.

Business Tax Provisions of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

paul — Tue, 18 Jan 2011 16:09:57 +0000

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.

2010 Year-End Tax Planning for Small Businesses

paul — Thu, 21 Oct 2010 15:54:19 +0000

As 2010 draws to a close, there is still time to reduce your 2010 tax bill and plan ahead for 2011. This post highlights several potential tax-saving opportunities for you to consider, new reporting requirements, and some 2011 changes. Paul would be happy to meet with you to discuss specific strategies and issues. Click here to contact Paul.

Deferring Income into 2011

If you expect your AGI to be higher in 2010 than in 2011, or if you anticipate being in the same or a higher tax bracket in 2010 than in 2011, you may benefit by deferring income into 2011. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket. Deferring income could be disadvantageous, however, if your deferred income is subject to §409A, thus making the income includible in gross income and subject to additional tax. 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 2011.

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.

Deferral of Income in Certain Debt Restructurings: Section 108(i) provides an election to defer cancellation of indebtedness (COD) income. Ordinarily, COD income is includible in gross income for the year in which the debt is canceled or reduced. However, under §108(i), COD income arising from a reacquisition of a debt instrument can be deferred and included in the taxpayer’s gross income ratably over the five taxable years beginning with the fourth taxable year for reacquisitions occurring in 2010 (if the reacquisition occurred in 2009, the pro-rata inclusion begins with the fifth taxable year after the reacquisition).

The provision applies whether the canceled debt is acquired for cash or is acquired in the form of a new debt instrument. Recent regulations have identified what types of transactions may accelerate recognition of the deferred COD income; it is important that we discuss the triggering transactions so that you can avoid them. The regulations also address the unique application of the acceleration rules to consolidated groups.

The window for undertaking transactions to which the §108(i) election can apply is rapidly closing.

Accelerating Income into 2010

In limited circumstances, you may benefit from accelerating income into 2010. For example, you may anticipate being in a higher tax bracket in 2011, or perhaps you will need additional income in order 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 2010 will be disadvantageous if you expect to be in the same or lower tax bracket for 2011.

If you report income and expenses on a cash basis, issue bills and attempt collection before the end of 2010. Also see if some of your clients or customers are willing to pay for January 2011 goods or services in advance. Any income received using these steps will shift income from 2011 to 2010.

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 7.5% of AGI floor. New for 2010, the deduction can be taken into account in computing self-employment taxes.

Equipment Purchases: If you purchase equipment, you may make a “§179 election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property. For 2010, under a new law just enacted, 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 2010. The new law also extends these amounts into 2011. Former law had the numbers at $250,000 for 2010 and $25,000 for 2011. Therefore, between now and the end of the year, if you previously maxed out the old $250,000 amount for 2010, you now have an additional $250,000 you can invest in your business and deduct. Also, new for 2010 and 2011, certain real property can qualify for the expense deduction, but the qualifying property cannot exceed $250,000 of the allowed deduction. In 2012, these dollar amounts will be reduced to $25,000 and $200,000 (subject to inflation adjustments).

In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2010. 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, $3,060 for 2010 ($3,160 in the case of vans and trucks). (If the vehicle qualifies for the 50% bonus depreciation in effect in 2010, these dollar amounts are increased by $8,000.) 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 2010, 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 2008. Certain “eligible losses” can be carried back three years; farming losses and qualified disaster losses (for losses arising in taxable years beginning after 2007 in connection with disasters declared after December 31, 2007) can be carried back five years.

Under a special law enacted in February 2009, and amended in November 2009, businesses can carry back losses incurred in taxable years beginning after 2007 and beginning before 2010 for up to five years instead of the standard two years. One such carryback is available under the provision as originally enacted, and another under the provision as amended in November 2009.

Bonus Depreciation: Although bonus depreciation was originally not in effect for 2010, the 2010 Small Business Jobs Act, enacted in late-September, revived it for 2010. Taxpayers can claim the 50% bonus depreciation allowance if the following requirements are met: (1) the original use of the property must begin with the taxpayer after December 31, 2007, and before January 1, 2011; (2) the property must be acquired by the taxpayer in 2008, 2009, or 2010, but only if no written binding contract for the acquisition was in effect before January 1, 2008, or acquired by the taxpayer pursuant to a written binding contract entered into in 2008, 2009, or 2010; (3) the property must be placed in service before 2011 (2012 in the case of long production period property (10 years or longer) or specified aircraft). 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. You can take advantage of this bonus depreciation for the remainder of 2010.

A contractor using the percentage-of-completion method of determining taxable income from a long-term contract does not need to take bonus depreciation into account in determining the cost of property otherwise eligible for bonus depreciation that has a MACRS recovery period of seven years or less and is placed in service during 2010 (or 2011 in the case of long production period property).

Increase in Amount of Deductible Start-Up Expenditures: For taxable years beginning in 2010, the Small Business Jobs Act increased the amount of start-up expenditures that a taxpayer can elect to deduct from $5,000 to $10,000. The Act has also increased the deduction phase-out threshold from $50,000 to $60,000, so that the $10,000 amount is reduced (but not below zero) by the amount by which the cumulative cost of start-up expenditures exceeds $60,000.

Bad Debts: You can accelerate deductions to 2010 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 2010 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.

Business Credits

Small Employer Pension Plan Startup Cost Credit: For 2010, 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 the first $1,000 in qualified administrative and retirement-education expenses for each of the first three plan years.

Employer-Provided Child Care Credit: For 2010, 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. Unless extended by Congress, this credit is unavailable for 2011.

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. Unemployed veterans and disconnected youth hired in 2010 qualify as a targeted group in addition to the existing targeted groups. This gives your business an expanded opportunity to employ new workers and be eligible for a tax credit against the wages paid.

Wages do not include amounts paid to certain individuals hired in 2010 during the one-year period beginning on the hiring date that qualify for payroll forgiveness under §3111(d).

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.

Business Credit for Retention of Certain Newly-Hired Individuals in 2010: For qualified employers in tax years ending after March 18, 2010, the current-year general business credit is increased for each retained worker by the lesser of: (a) $1,000, or (b) 6.2% of the wages paid to the retained worker during the 52 consecutive week period for a “retained worker.”

Carryback of Business Credits: Pursuant to the 2010 Small Business Jobs Act, the credit carryback period for eligible small business credits is extended from one to five years. Eligible small business credits are defined as the sum of the general business credits determined for the taxable year with respect to an eligible small business. An eligible small business is, with respect to any taxable year, a corporation the stock of which is not publicly traded, or a partnership, that meets the gross receipts test of §448(c) (substituting $50 million for $5 million each place it appears). In the case of a sole proprietorship, the gross receipts test is applied as if it were a corporation. Credits determined with respect to a partnership or S corporation are not treated as eligible small business credits by a partner or shareholder unless the partner or shareholder meets the gross receipts test for the taxable year in which the credits are treated as current-year business credits.

Alternative Minimum Tax

AMT Suspension for Eligible Small Businesses’ General Business Credits: Effective for eligible small business credits (the sum of an eligible small business’s general business credits) determined in a taxpayer’s first taxable year beginning after 2009, the tentative minimum tax is treated as zero. Thus, an eligible small business credit may offset both regular tax and AMT liability.

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 2010, 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.

Retirement Plans

In-Plan Roth Rollovers: A much anticipated provision of the 2010 Small Business Jobs Act allows §401(k) plan participants in elective deferral plans to rollover their pre-tax account balances to Roth-designated accounts within the plan. This will allow the Roth rollover funds to stay within the employer-sponsored plan, instead of migrating to Roth IRAs with brokers, mutual fund companies, banks, etc. The rule is effective on September 27, 2010.

However, to take advantage of this change, the plan must contain a qualified designated Roth contribution program that allows rollovers from eligible distributions. This would involve not only amending the plan but the administrative aspects of setting up new plan features and participant communications as well. The IRS is expected to provide employers with a remedial amendment period that allows the employer to offer this option to employees (and surviving spouses) for distributions during 2010 and then have sufficient time to amend the plan to reflect this feature. Thus, employers can permit conversions in 2010 and still have time to amend their plans.

Other 2010 Opportunities

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 is shortened to seven years. (As discussed below, it is shortened even more for tax years beginning in 2011.)

100% Exclusion of Gain Attributable to Certain Small Business Stock: The incentive for individuals to acquire qualified small business stock is higher between now and December 31, 2010. 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 is increased to 75% for qualified small business stock acquired after February 17, 2009, and before September 28, 2010. The Small Business Jobs Act excludes 100% of the gain for qualified small business stock acquired or issued after September 27, 2010, and before January 1, 2011.

Qualifying Dividends: Qualifying dividends received in 2010 are subject to rates similar to the capital gains rates. Therefore, qualifying dividends are taxed at a maximum rate of 15%. Qualifying dividends include dividends that domestic and certain foreign corporations pay to their shareholders. Note that if Congress does not act to extend the reduced dividend rates, beginning in 2011 the rates will revert back to pre-2001 levels (i.e., will be taxed at the taxpayer’s ordinary income rate, up to a maximum of 39.6%). The President has proposed to keep qualifying dividend income taxed at the same rate as capital gains, which could increase to 20% in 2011.

Attribute-Carryover-Limitation Relief: Section 382(n) provides that the §382 limitation does not apply to certain ownership changes occurring after February 17, 2009, as part of taxpayers’ restructuring plans that are required under loan agreements or commitments for lines of credit entered into with Treasury under TARP.

Reporting

Uncertain Tax Positions: Starting with the 2010 tax year, new Schedule UTP, Uncertain Tax Position Statement, will require certain corporate taxpayers under the jurisdiction of the Large Business and International Division (LB&I)—the new name of the LMSB—to disclose their “uncertain tax positions” (UTPs) annually. A corporation will need to file Schedule UTP with its income tax return if it: (1) files Form 1120, Form 1120-F, Form 1120-L, or Form 1120-PC; (2) has assets of at least $100 million; (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 UTPs. A UTP is a tax position that will result in an adjustment to a line item on a return if the position is not sustained, provided the corporation has taken the position for the current or a prior tax year and the corporation (or a related party) either recorded a reserve for the position or did not record a reserve because it expects to litigate the position.

Planning Ahead for 2011

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 is shortened to seven years, and—since enactment of the Small Business Jobs Act—the special holding period is shortened to five years for tax years beginning in 2011.

Information Reporting Requirements for Transfers of Securities: The Energy Improvement and Extension Act of 2008 added three provisions to the Code that impose reporting requirements related to the transfer of securities. Every broker required to report the gross proceeds from the sale of a “covered security” must also report the customer’s adjusted basis in the security and whether any gain or loss with respect to the security is long-term or short-term. “Covered securities” include most stock acquired beginning in 2011. Also beginning in 2011, a broker transferring covered securities to another account must furnish the receiving broker with a written statement that allows the receiving broker to satisfy the new basis reporting requirements. (The IRS, however, has decided not to assert penalties for failure to furnish the transfer statement for certain types of transfers occurring in 2011.) Moreover, if an issuer of stock takes a major corporate action (such as a stock split, merger, or acquisition) that affects basis, then—beginning in 2011—the issuer must report to the IRS and to each stockholder a description of the action and the effect the action has on basis.

If you have any questions, please do not hesitate to call. 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 2010 tax liability, as well as plan ahead to reduce your 2011 tax liability. Click here to contact Paul.

Tax Deduction: Percentage Depletion versus Cost Depletion

paul — Thu, 01 Jul 2010 14:37:34 +0000

Depletion is the using up of natural resources by mining, quarrying, drilling, or felling. The depletion deduction allows an owner or operator to account for the reduction of a product’s reserves. There are two ways of figuring depletion: cost depletion and percentage depletion. For mineral property, you generally must use the method that gives you the larger deduction. For standing timber, you must use cost depletion. Cost depletion is computed on the basis of initial capitalization costs. Over the life of the well, a portion of these costs can be recovered each year based on the percentage of the production for the year as compared to the estimated recoverable oil and gas reserves at the beginning of the year. Percentage depletion is computed on the basis of the income from the property rather than capitalization costs. The tax shelter provided by percentage depletion may result in a larger deduction than cost depletion. Percentage depletion allows a tax deduction equal to 15% of the gross revenue from and oil or gas producing property. If you have questions regarding depletion or related issues click here to contact Paul.

Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

paul — Wed, 26 May 2010 15:24:22 +0000

Foreign companies often form U.S. subsidiaries when they enter or expand their U.S. operations. If your business involves a foreign entity and US related entity your business will have to file IRS Form 5472 for every transaction with its related business entity. Form 5472 is an information return and does not impose a tax, but rather the form is used as a reporting mechanism to ensure compliance with US tax law. In short, it is a audit tool for the IRS. It becomes very important to properly report on Form 5472 so that the IRS does use this audit tool as a weapon against its filer. If you need assistance in preparing or reviewing your company’s 5472 and related party transactions click here to contact Paul.