IR Provides Tax Relief to Victims of Hurricane Isaac; Return filing and Tax Payment Deadline Extended to Jan. 11, 2013
The Internal Revenue Service is providing tax relief to individuals and businesses affected by Hurricane Isaac.
Following recent disaster declarations for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Louisiana and Mississippi will receive tax relief, and other locations may be added in coming days based on additional damage assessments by FEMA.
The tax relief postpones various tax filing and payment deadlines that occurred on or after Aug. 26. As a result, affected individuals and businesses will have until Jan. 11, 2013 to file these returns and pay any taxes due. This includes corporations and businesses that previously obtained an extension until Sept. 17, 2012, to file their 2011 returns and individuals and businesses that received a similar extension until Oct. 15. It also includes the estimated tax payment for the third quarter of 2012, normally due Sept. 17.
The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. In addition, the IRS is waiving failure-to-deposit penalties for federal employment and excise tax deposits normally due on or after Aug. 26 and before Sept. 10, if the deposits are made by Sept. 10, 2012. Details on available relief, including information on how to claim a disaster loss by amending a prior-year tax return, can be found on the disaster relief page on IRS.gov.
The tax relief is part of a coordinated federal response to the damage caused by the hurricane and is based on local damage assessments by FEMA. For information on disaster recovery, individuals should visit disasterassistance.gov.
So far, IRS filing and payment relief applies to the following localities:
In Louisiana: Ascension, Jefferson, Lafourche, Livingston, Orleans, Plaquemines, St. Bernard, St. Charles, St. John the Baptist and St. Tammany parishes;
In Mississippi: Hancock, Harrison, Jackson and Pearl counties.
The President's Framework for Business Tax Reform
On February 22, the Treasury Department released a document called "The President's Framework for Business Tax Reform." It carries a rough blueprint for the President's plan to cut corporate tax rates, simplify corporate tax rules, and reform the international tax rules. It also carries some proposals for simplifying and reducing the tax burden for small businesses.
Arguments for corporate tax reform. The "President's Framework for Business Tax Reform" says a corporate tax overhaul is necessary because of the following flaws in the current tax system:
- Today's system, which trades off a high corporate rate and a base that's narrowed by tax breaks, is uncompetitive relative to other countries, distorts business decision making, and slows economic growth.
- The complexity of today's tax rules increases compliance costs for businesses, increases enforcement costs for IRS, and invariably leads to disputes between businesses and IRS, requiring significant expenses to adjudicate these disputes.
- Industry-specific tax preferences produce a wide disparity in average tax rates across industries, resulting in a tax system that distorts investment decisions.
- Current corporate rules encourage corporations to finance themselves with debt (because interest payments are deductible) instead of equity (because corporate dividends aren't deductible). The resultant "outsize reliance" on debt financing can raise the risk of financial distress and thus raise the risk of bankruptcy.
- Large companies are increasingly avoiding corporate tax liability by organizing themselves as pass-through businesses. The ability of large pass-through entities to take advantage of preferential tax treatment has placed businesses organizing as C-corporations at a disadvantage. By allowing large pass-through entities preferential treatment, the tax code distorts choices of organizational form, which can lead to losses in economic efficiency.
- Current incentives to shift income abroad significantly erode the U.S. tax base and leads to lower corporate tax receipts.
Prescription for corporate tax reform. The "President's Framework for Business Tax Reform" carries the following proposals to overhaul the corporate tax rules.
Observation: Many of the proposals aren't new and have been put forth by the Administration, for example, in its budget proposals, as well as by the President's Economic Recovery Advisory Board. Reduce the top corporate tax rate from 35% to 28%.
Observation: Republicans have objected that 28% is still too high. However, it's not far off from the 25% top tax rate for business that was put forth in 2011 by Representative Paul Ryan (R-WI), chairman of the House Budget Committee, in his "Path to Prosperity" plan.
Cut the top corporate tax rate on manufacturing income to 25% and to an even lower rate for income from advanced manufacturing activities. This would be accomplished by reforming the Code Sec. 199 domestic production activities deduction to: focus more on manufacturing activity; increase the credit to 10.7%; and increase it even more for advanced manufacturing.
Eliminate tax breaks for specific industries "with the few exceptions that are critical to broader growth or fairness." Tax breaks that would be targeted would include the following: last-in, first-out (LIFO) accounting; tax breaks for the oil and gas industry; interest deductions allocable to life insurance insurance policies (would be disallowed unless the contract is on an officer, director, or employee who is at least 20% owner of the business); current rules allowing "carried interest" to be taxed at preferential capital gains rates (would be taxed as ordinary income); and special depreciation rules that allow owners of non-commercial planes to depreciate them more quickly (over five years) than commercial aircraft (over seven years).
Revise current depreciation schedules that generally overstate the true economic depreciation of assets.
Observation: Presumably this would mean longer depreciation periods for tangible assets and restricted (or eliminated) use of accelerated depreciation.
Reduce the deductibility of interest by corporations.
Establish greater parity between large corporations and large noncorporate counterparts.
Observation: One suggestion that has been floated before is to tax as corporations pass-through entities with gross receipts exceeding a specific level, for example, $50 million.
Require greater disclosure of annual corporate income tax payments, to improve transparency and reduce accounting gimmicks.
Overhaul the current research tax credit, which makes businesses choose between using a complex formula to calculate their R&E credit at a 20% rate, and a much simpler approach that provides a 14% credit. The rate of the simpler credit would be increased to 17% and the credit would be made permanent to increase certainty and effectiveness.
Extend, consolidate, and enhance key tax incentives to encourage investment in clean energy. The tax credit for production of renewable electricity would be made permanent and would be refundable.
Subject income earned by subsidiaries of U.S. corporations operating abroad to an unspecified minimum rate of tax. This would stop the tax system from rewarding companies that move profits offshore. Thus, foreign income deferred in a low-tax jurisdiction would be subject to immediate U.S. taxation up to an unspecified minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country.
Create a 20% income tax credit for the expenses of moving business operations back to the U.S., and disallow deductions for moving business operations abroad.
Taxing currently the excess profits associated with shifting intangibles to low-tax jurisdictions.
Small business tax proposals. In an effort to show the tax problems of small businesses haven't been overlooked, the President's proposal calls for simplifying the tax rules that apply to them and adding incentives to help build “innovation and entrepreneurship.” Specifics include: allowing small businesses to expense up to $1 million under Code Sec. 179; allowing cash method accounting for businesses with up to $10 million in gross receipts (up from current law's $5 million); doubling the amount of currently deductible start-up costs from $5,000 to $10,000; and expanding the health insurance credit for small businesses.
The entire document can be viewed at http://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-Framework-for-Business-Tax-Reform-02-22-2012.pdf
IRS Tax Tip 2012 - Don't Be Scammed by Cyber Criminals
The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious emails, phone calls, faxes, or notices claiming to be from the IRS. Many of these scams fraudulently use the IRS name or logo as a lure to make the communication appear more authentic and enticing. The goal of these scams - known as phishing - is to trick you into revealing your personal and financial information. The scammers can then use your information - like your Social Security number, bank account or credit card numbers - to commit identity theft or steal your money. Here are five things the IRS wants you to know about phishing scams:
- The IRS never asks for detailed personal and financial information like PIN numbers, passwords, or similar secret access information for credit card, bank or other financial accounts.
- The IRS does not initiate contact with taxpayers by email to request personal or financial information. If you receive an email from someone claiming to be the IRS or directing you to an IRS site:
- Do not reply to the message.
- Do not open any attachments. Attachments may contain malicious code that will infect your computer.
- Do not lick on any links. If you clicked on links in a suspicious email or phishing website and entered confidential information, visit the IRS website and enter the search term "identity theft" for more information and resources to help.
- The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogusm do not provide any personal information on the suspicious site and report it to the IRS.
- If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious email to email@example.com.
- You can help shut down these schemes and prevent others from being victimized. Details on how to report specific types of scams and what to do if you've been victimized are available at www.irs.gov. Click on "phishing" on the home page.
IRS Guidance on Health Insurance Coverage Information Reporting for Employers on 2012 W-2's
Notice 2012-9, 2012-4 IRB
A new Notice has modified previous interim guidance on the Patient Protection and Affordable Care Act's (PPACA's) information reporting requirement for employer-sponsored health coverage. Like the previous guidance, the Notice provides guidance on the nuts and bolts of the information reporting rule for employers who will be subject to it, and those employers that choose to voluntarily comply with it.
Background. For tax years beginning on or after Jan. 1, 2011, Code Sec. 6051(a)(14) which was added by PPACA §9002, generally provides that the aggregate cost of the applicable employer-sponsored health insurance coverage (as defined in Code Sec. 4980I(d)(1)) must be reported on Form W-2, Wage and Tax Statement. For this purpose, the aggregate cost is to be determined under rules similar to the rules of Code Sec. 4980B(f)(4), referring to the definition of the “applicable premium” under the rules providing for COBRA continuation coverage. Code Sec. 6051(a)(14) does not, however, apply to reporting the amount contributed to an Archer MSA or the health savings account (HSA) of an employee or the employee's spouse, any salary reduction contributions to a flexible spending arrangement (FSA), or certain “excepted benefits” described in Code Sec. 9832(c)(1) including worker's compensation and disability income insurance.
In Notice 2010-69, 2010-44 IRB 576, IRS made this new reporting requirement optional for all employers for the 2011 Forms W-2 (which would generally be given to employees in January 2012).
In Notice 2011-28, 2011-16 IRB 656, IRS provided further relief for small employers (i.e., those filing fewer than 250 Forms W-2) by making Code Sec. 6051(a)(14) reporting optional for health coverage provided through at least 2012, or until further guidance is issued by IRS. Thus, employers wouldn't have to report the cost of health care coverage on any forms required to be furnished to employees before January 2014, at the earliest.
New interim guidance. In Notice 2012-9, IRS modifies, adds to, and replaces the guidance in Notice 2011-28 with additional guidance, in question and answer (Q&A) format, for employers who are subject to the information reporting requirement for the 2012 Forms W-2, and employers that choose to voluntarily comply with it for either 2011 or 2012. The Q&As, like those in Notice 2011-28, cover: general requirements; methods for reporting the cost of coverage on Form W-2; definitions of terms relating to the cost of coverage required to be reported; the types of coverage for which the cost is required to included on Form W-2; calculation methods used to determine the cost of coverage; and issues that an employer may have to address in determining the cost of coverage.
IRS emphasizes that this reporting to employees is for their information only. The reporting is intended to inform them of the cost of their health care coverage, and doesn't cause excludable employer-provided health care coverage to become taxable.
In particular, Notice 2012-9 includes the following changes to Notice 2011-28:
· revised Q&A 3 clarifies the application of the interim relief from the reporting requirement for employers filing fewer than 250 Forms W-2 for the preceding calendar year;
· revised Q&A 7 clarifies the application of the reporting requirement to certain related employers not using a common paymaster;
· Q&A 19 adds a new example that demonstrates that the reporting requirement doesn't apply to coverage under a health flexible spending arrangement (FSA) if contributions occur only through employee salary reduction elections;
· revised Q&A 20 clarifies that the standard for determining whether coverage under a dental plan or vision plan is subject to the reporting requirement is based upon the same standard for determining whether the coverage is subject to the rules set out in the regs under the Health Insurance Portability and Accountability Act of '96 (HIPAA); and revised and corrected Q&A 23 clarifies that the reporting requirement doesn't apply to the cost of coverage includible in income under Code Sec. 105(h), or payments or reimbursements of health insurance premiums for a 2% shareholder-employee of an S corporation who is required to include the premium payments in gross income.
Under Notice 2011-28, if an employer is required to file fewer than 250 2011 Forms W-2, the employer would not be subject to the reporting requirement for 2012 Forms W-2. Notice 2012-9 provides that for this purpose, whether an employer is required to file fewer than 250 Forms W-2 for a calendar year is determined based on the Forms W-2 that employer would be required to file if it filed Forms W-2 to report all wages paid by that employer and without regard to the use of an agent under Code Sec. 3504. For example, an employer that would have filed only 100 Forms W-2 for the previous year had it not used an agent under Code Sec. 3504 will not be subject to the reporting requirement for the year, nor will an agent under Code Sec. 3504 with respect to that employer's Forms W-2 for the year. In contrast, if the same employer would have filed 300 Forms W-2 for the previous year had it not used an agent under Code Sec. 3504, that employer would be subject to the reporting requirement for the year so that if an agent under Code Sec. 3504 is used again, the information will need to be provided to the agent and reported on the Form W-2.
Notice 2012-9 also:
· provides that employers aren't required to include the cost of coverage under an employee assistance program (EAP), wellness program, or on-site medical clinic in the reportable amount if the employer doesn't charge a premium for that type of coverage provided under COBRA to a qualifying beneficiary (Notice 2012-9, Q&A-32);
· clarifies that employers may include the cost of coverage under programs not required to be included under applicable interim relief, such as the cost of coverage under a Health Reimbursement Arrangement (HRA) (Notice 2012-9, Q&A-33);
· clarifies how to calculate the reportable amount for coverage only a portion of which constitutes coverage under a group health plan (Notice 2012-9, Q&A-34); and
· provides that the reportable amount is not required to be included on a Form W-2 provided by a third-party sick pay provider (Notice 2012-9, Q&A-39).
Effective date. Notice 2012-9's interim guidance is generally applicable beginning with 2012 Forms W-2 (that is, the forms required for the calendar year 2012 that employers are generally required to give employees by the end of January 2013 and then file with the Social Security Administration). Employers may rely on the guidance provided in Notice 2012-9 if they voluntarily choose to report the cost of coverage on 2011 Forms W-2, even though this reporting isn't required for 2011. This interim guidance is applicable until further guidance is issued. To the extent that future guidance applies the reporting requirement to additional employers or categories of employers or additional types of coverage, that guidance will apply prospectively only and will not apply to any calendar year beginning within six months of the date the guidance is issued.
IRS notes that the transition relief in Notice 2012-9 will be available at least for 2012 Forms W-2, and that the availability of this transition relief for 2012 Forms W-2 will not be affected by the issuance of any further guidance. Thus, for example, as provided in Notice 2012-9, Q&A-3, employers that are required to file fewer than 250 2011 Forms W-2 will not be subject to the reporting requirement for 2012 Forms W-2.
Final Version of Form 8938 (Statement of Specified Foreign Financial Assets)
As recently announced in IR 2011-117, IRS has released the final version of Form 8938 (Statement of Specified Foreign Financial Assets) and its Instructions, which individuals must use to report specified foreign financial assets under Code Sec. 6038D for tax year 2011. Until IRS issues regs in the future, only individuals, and not specified domestic entities, must file Form 8938. The Instructions carry a number of examples of who does and doesn't have to file Form 8938.
Background. For tax years beginning after Mar. 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act, P.L. 111-147) provides that individuals with an interest in a “specified foreign financial asset” during the tax year must attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 (or a higher dollar amount as IRS may prescribe). (Code Sec. 6038D(a)) In addition, to the extent provided by IRS in regs or other guidance, Code Sec. 6038D applies to any domestic entity formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if the entity were an individual. (Code Sec. 6038D(f))
“Specified foreign financial assets” are: (1) depository or custodial accounts at foreign financial institutions, and (2) to the extent not held in an account at a financial institution, (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. (Code Sec. 6038D(b))
A specified person who fails to provide required information for any tax year is subject to a $10,000 penalty. A failure continuing for more than 90 days after the day on which IRS mails a notice of the failure to the specified person subjects the specified person to an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired, up to a maximum penalty of $50,000 for each such failure. (Code Sec. 6038D(d)) No penalty applies if the failure was due to reasonable cause and not willful neglect. (Code Sec. 6038D(g))
In Notice 2011-55, 2011-29 IRB 53, IRS suspended the Code Sec. 6038D reporting requirements until it releases Form 8938 (see Federal Taxes Weekly Alert 06/23/2011). Individuals for whom the filing of Form 8938 was suspended for a tax year will have to attach the form for the suspended tax year to their next income tax return required to be filed with IRS.
In October of 2011, IRS released a draft version of Form 8938 (see Federal Taxes Weekly Alert 10/06/2011).
For recently issued temporary and proposed regs on the Code Sec. 6038D reporting requirement (see article “Regs flesh out foreign asset reporting which begins this filing season” that appeared in Newsstand e-mail 12/16/2011).
Who must file Form 8938. Unless an exception applies, a taxpayer must file Form 8938 if: (1) they are a specified person that has an interest in specified foreign financial assets; and (2) the value of those assets is more than the applicable reporting threshold.
Observation: The Instructions note that specified persons aren't required to file Form 8938 for any tax year for which they aren't required to file an annual return, even if the value of their specified foreign financial assets is more than their applicable reporting threshold.
A specified person includes any specified individual or—to the extent provided in future regs—a specified domestic entity if it is formed or availed of to hold specified foreign financial assets. If the value of the specified foreign financial assets is more than the appropriate reporting threshold and no exception applies, taxpayers must file Form 8938 even if none of the specified foreign financial assets affect their tax liability for the tax year. Generally, a specified individual is: a U.S. citizen; a resident alien of the U.S. for any part of the tax year; a nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return; or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.
If a taxpayer and his spouse file a joint return (and so would file one combined Form 8938 for the tax year), he must include the value of the asset jointly owned with his spouse only once to determine the total value of all of the specified foreign financial assets that they own. If a taxpayer and his spouse are specified individuals and each files a separate return, he includes one-half of the value of the asset jointly owned with his spouse to determine the total value of all of his specified foreign financial assets. If a taxpayer has joint ownership with a spouse who isn't a specified individual or someone other than a spouse, each joint owner includes the entire value of the jointly owned asset to determine the total value of all of that joint owner's specified foreign financial assets.
Individuals living in the U.S. The following reporting thresholds apply to taxpayers living in the U.S.:
· An unmarried taxpayer satisfies the reporting threshold only if the total value of his specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
Illustration 1: Bev isn't married and doesn't live abroad. She sold her only specified foreign financial asset on October 15, when its value was $125,000. Held: Bev has to file Form 8938. She satisfies the reporting threshold even though she doesn't hold any specified foreign financial assets on the last day of the tax year because she did own specified foreign financial assets of more than $75,000 at any time during the tax year. (Instructions for Form 8938, page 3)
Illustration 2: Anne isn't married and doesn't live abroad. Anne and an unrelated U.S. resident jointly own a specified foreign financial asset valued at $60,000. Held: Each has to file Form 8938 because each satisfies the reporting threshold of more than $50,000 on the last day of the tax year. (Instructions for Form 8938, page 3)
· Married taxpayers filing a joint income tax return satisfy the reporting threshold only if the total value of their specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 any time during the tax year.
Illustration 3: Carl and his wife file a joint income tax return and do not live abroad. They jointly own a single specified foreign financial asset valued at $60,000. Held: They do not have to file Form 8938 cause they do not satisfy the reporting threshold of more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. (Instructions for Form 8938, page 3)
Illustration 4: David and Cindy do not live abroad. They file a joint income tax return, and jointly and individually own specified foreign financial assets. On the last day of the tax year, they jointly own a specified foreign financial asset with a value of $90,000. Cindy also has a separate interest in a specified foreign financial asset with a value of $10,000, while David has a separate interest in a specified foreign financial asset with a value of $1,000. Held: David and Cindy must file a combined Form 8938. They have an interest in specified foreign financial assets in the amount of $101,000 on the last day of the tax year—i.e., ($90,000, the entire value of the specified foreign financial asset that they jointly own, + $10,000, the value of the asset that Cindy separately owns, + $1,000, the value of the asset that David separately owns). David and Cindy satisfy the reporting threshold of more than $100,000 on the last day of the tax year. (Instructions for Form 8938, page 3)
· A married taxpayer filing a separate income tax return satisfies the reporting threshold only if the total value of his specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
Illustration 5: Fred and Ethel do not live abroad. They file separate returns, and jointly own a specified foreign financial asset valued at $60,000 for the entire year. Held: Neither has to file Form 8938. They each use one-half of the value of the asset, $30,000, to determine the total value of specified foreign financial assets that they each own. Neither satisfies the reporting threshold of more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. (Instructions for Form 8938, page 3)
Individuals living abroad. The following reporting thresholds apply to a taxpayer living abroad—i.e., whose tax home is in a foreign country and who is (1) a U.S. citizen who has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year; or (2) a U.S. citizen or resident who is present in a foreign country at least 330 full days during any period of 12 consecutive months that ends in the tax year being reported:
· A taxpayer who doesn't file a joint return satisfies the reporting threshold if the total value of his specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
Illustration 6: Dan and Betty live abroad and file separate income tax returns. Betty isn't a specified individual. On the last day of the tax year, Betty and Dan jointly own a specified foreign financial asset with a value of $150,000. Betty has a separate interest in a specified foreign financial asset with a value of $10,000, while Dan has a separate interest in a specified foreign financial asset with a value of $60,000. Held: Dan has to file Form 8938 but Betty, who isn't a specified individual, doesn't. Dan has an interest in specified foreign financial assets in the amount of $210,000 on the last day of the tax year—i.e., $150,000, the entire value of the asset that he jointly owns, + $60,000, the entire value of the asset that he separately owns). He satisfies the reporting threshold for a married individual living abroad and filing a separate return of more than $200,000 on the last day of the tax year. (Instructions for Form 8938, page 3)
· A married taxpayer who files a joint income tax return satisfies the reporting threshold only if the total value of all specified foreign financial assets he or his spouse owns is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
Form 8938, Statement of Specified Foreign Financial Assets (Nov. 2011) can be viewed on the IRS website at http://www.irs.gov/pub/irs-pdf/f8938.pdf. The Instructions for Form 8938 (Nov. 2011) can be viewed at http://www.irs.gov/pub/irs-pdf/i8938.pdf.
Social Security Wage Base Increase
The Social Security wage base will increase in 2012 to $110,100, a $3,300 increase over the 2011 amount and the first jump since 2009. The wage base did not go up in 2010 or 2011 because the law does not allow an increase in the cap in years when there is no cost of living hike for Social Security beneficiaries. The benefits increase for 2012 will go up 3.6%.
Individuals who turn 66 in 2012 will not lose any benefits if they earn $38,880 or less before they reach that age. Individuals between the ages of 60 to 66 by the end of 2012 can make up to $14,640 before losing any benefits. There is no earning cap once a beneficiary turns 66.
Reporting Capital Gains for 2011
Reporting capital gains on individual income tax returns for 2011 is going to be more complicated – at least two forms will be required: Schedule D and new Form 8949. Basis reporting rules went into effect for securities bought after 2010 and sold in 2011 and later. All sales will be listed on Form 8949 and totals will be carried to Schedule D. Separate 8949’s must be filed for sales where the basis is reported by the broker, for sales where the basis is not reported and for any dispositions where no Form 1099-B is received reporting the gross proceeds.
Are the Rich Being Taxed Too Little or Too Much?
Recent IRS statistics on 2009 individual income tax returns may shed some light on this debate:
For 2009, 140,494,127 individual income tax returns were filed. Of those 481,054 reported adjusted gross incomes of over $1,000,000
The top 1% of all filers paid 36.7% of all individual income taxes and reported 16.9% of total adjusted gross income (AGI) for 2009. To make this 1%, the minimum AGI was $343,927. The average tax rate paid by this group was 24% (higher than Warren Buffet’s 17.4%).
The highest 5% of filers paid 58.7% of total income tax and accounted for 31.7% of all AGI. Minimum AGI was $154,643.
The top 10% had AGI’s of $112,124 (43% of all AGI) or more and bore 70.5% of the tax burden.
The bottom 50% of filers paid 2.25% of all income tax and had an average tax rate of 12.5% of AGI.
American Jobs Act introduced in Senate with millionaires' surtax
Late on October 5, Senate Majority Leader Reid (D-NV) introduced S. 1660, the American Jobs Act of 2011. Reid made changes to the President's original Jobs Act proposal by replacing the original pay-fors in the President's plan with a millionaires' surtax. Reid's bill also would add a provision deferring controversial governmental contractor withholding until 2014. Reid filed closure on the bill on October 6, and the vote is slated to take place the week of October 13.
The American Jobs Act would be paid for through a 5.6% surtax on modified adjusted gross income (MAGI) in excess of $1 million for single filers, heads of households, and marrieds filing jointly ($500,000 for married taxpayers filing separately). The surtax would apply for tax years beginning after Dec. 31, 2012, and the $1 million threshold would be inflation-indexed after 2013. For surtax purposes, MAGI would mean AGI reduced by any deduction (not taken into account in determining adjusted gross income) allowed for investment interest (as defined in Code Sec. 163(d)).
New IRS Voluntary Compliance Initiative for Misclassified Independent Contractors
On September 21, 2011, the IRS introduced an extremely favorable settlement program for those employees who have misclassified employees as independent contractors to reclassify them as employees and eliminate the tax exposure.
This favorable program includes audit protection for prior years and abatement of interest and penalties. The complete announcement can be viewed as http://www.irs.gov/pub/irs-drop/a-11-64.pdf
Employers with any concerns as to the classification of independent contractors should contact us for guidance on how to proceed under this voluntary initiative.
Administration submits "American Jobs Act of 2011" to Congress
On September 12, the Obama Administration submitted the "American Jobs Act of 2011" to Congress. IT formally released the legislative text of the proposed jobs-and-stimulus measure, along with a section-by-section summary.
Businesses would be the major beneficiaries of the President's tax proposals, which would include the following.
For the last quarter of 2011 and for the calendar year 2012, create a payroll tax credit that fully offsets the employer Social Security tax that otherwise would apply to increases in wages. The credit would be available on up to $50 million of an employer's increased wages.
If your business is planning to hire employees in the next week or so, you might consider postponing the hire date until 10/1/2011 in order to benefit from the proposed credit. As a reminder, this is very preliminary and not yet the law, but you should be aware of this in case it could impact you favorably.
For more information on the American Jobs Bill of 2011, click here.
Personal use of employer provided cell phones generally nontaxable under new guidance
Close to one year after cell phones were removed from the “listed property” category of Code Sec. 280F, IRS has explained the practical consequences of the change. In sum, where an employer provides employees with cell phones primarily for noncompensatory business reasons, neither the business nor personal use of the phone result in income to the employee, and no recordkeeping of usage is required. And, in most instances, an employer's reimbursement to employees for their providing a cell phone for bona fide business use won't be taxable. The guidance applies for all tax years after Dec. 31, 2009.
Background. Under Code Sec. 280F, there's no deduction for listed property unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement: the amount of the expense or other item; the use of the property; the business purpose of the expense or other item; and the business relationship to the taxpayer of persons using the property.
Cell phones used to be listed property, but for tax years beginning after Dec. 31, 2009, the Small Business Jobs Act of 2010 (the Act, P.L. 111-240), removed cell phones and other similar telecommunications equipment from the “listed property” category under Code Sec. 280F. The problem was that the Act didn't deal with the consequences of personal use of an employer-provided cell phone, or an employer's reimbursement of an employee-provided cell phone for business use.
The relevant statutory rules are as follows:
- Ordinary and necessary business expenses are deductible under Code Sec. 162. However, under Code Sec. 262(a), no deduction is allowed for personal, living, or family expenses, unless otherwise provided.
- An employee generally must include in gross income the amount by which the fair market value of a fringe benefit exceeds the sum of (a) the amount, if any, paid for the benefit by or on behalf of the employee, and (b) the amount, if any, specifically excluded from gross income by some other section of the Code. But gross income does not include a working condition fringe benefit (WCFB), which is defined as any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, the amount paid would be allowable as a deduction under Code Sec. 162 or Code Sec. 167.
- If, under Code Sec. 274 or another Code section, certain substantiation requirements must be met in order for a deduction under Code Sec. 162 or Code Sec. 167 to be allowable, then those substantiation requirements apply in determining whether a property or service is excludable as a WCFB. The Code Sec. 274 substantiation requirements are satisfied by adequate records or sufficient evidence corroborating the employee's own statement. As a result, such records or evidence provided by the employee, and relied upon by the employer to the extent permitted by the Code Sec. 274(d) regs, are enough to substantiate a WCFB.
- Code Sec. 132(a)(4) provides a specific exclusion from gross income for de minimis fringe benefits. A de minimis fringe benefit is any property or service whose value is so small that accounting for it is unreasonable or administratively impracticable, taking into account the frequency with which similar fringe benefits are provided by the employer to its employees.
According to the Committee Report to the Act, the post-2009 “delisting” of cell phones didn't affect IRS's authority to determine the appropriate characterization of cell phones as a WCFB under Code Sec. 132(d), and didn't affect IRS's authority to determine that the personal use of cell phones that are provided primarily for business purposes may qualify as a de minimis fringe benefit.
After the Act's passage, we observed that IRS may well declare an employee's personal use of an employer-provided cell phone to be a tax-free de minimis fringe benefit (see Federal Taxes Weekly Alert 09/30/2010), and that's just what IRS has now done.
New guidance for employer-provided cell phones. Notice 2011-72, provides that an employer is treated as having provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer's business, other than providing compensation to the employee, for providing the phone. Examples include contacting the employee at all times for work-related emergencies, or the employee's availability to speak with clients when he's away from the office or call clients in other time zones after his normal workday is over. However, a cell phone provided to promote employee morale or goodwill, to attract prospective employees, or to provide additional compensation to employees is not provided primarily for noncompensatory business purposes.
When an employee is provided with a cell phone primarily for noncompensatory business reasons, IRS will treat his use of the cell phone for reasons related to the employer's trade or business as an excludable WCFB. Also, solely for determining whether the WCFB rule in Code Sec. 132(d) applies, the substantiation requirements that the employee would have to meet in order to claim a deduction under Code Sec. 132 are deemed to be met. An employee's personal use of a cell phone provided by the employer primarily for noncompensatory business purposes is excludable as a de minimis fringe benefit.
IRS stresses that the application of the WCFB and de minimis fringe benefit exclusions under Notice 2011-72, apply solely to employer-provided cell phones and should not be interpreted as applying to other fringe benefits.
Employer reimbursement of employee-provided phone. A Sept. 14, 2011, memo (“Interim Guidance on Reimbursement of Employee Personal Cell Phone Usage in light of Notice 2011-72”) for all field exam operations addresses the situation of employers that have substantial, noncompensatory business reasons for requiring employee use of personal cell phones in connection with their businesses, and reimburse them for their use. Here, examiners are told that they “should not necessarily assert that the employer's reimbursement of expenses incurred by employees after December 31, 2009, results in additional income or wages to the employee.”
However, the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer's business, and the reimbursement must be reasonably calculated so as not to exceed expenses the employee actually incurred in maintaining the cell phone. Additionally, the reimbursement for business use of the employee's personal cell phone must not be a substitute for a portion of the employee's regular wages. Examiners are told that arrangements replacing part of an employee's previous wages with a reimbursement for business use of the employee's personal cell phone and arrangements that allow for the reimbursement of unusual or excessive expenses “should be examined more closely.”
RIA observation: IR 2011-92, is more to the point. It says that employers that require employees, primarily for noncompensatory business reasons, to use personal cell phones for business calls may treat reimbursements of employee expenses for reasonable cell phone coverage as nontaxable. It cautions, however, that this result won't apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee's regular wages.
The IRS news release can be viewed at http://www.irs.gov/newsroom/article/0,,id=245741,00.html, the Notice can be viewed at http://www.irs.gov/pub/irs-drop/n-11-72.pdf. The IRS memo for all field exam operations dated Sept. 14, 2011 entitled “Interim Guidance on Reimbursement of Employee Personal Cell Phone Usage in light of Notice 2011-72” can be viewed at http://www.irs.gov/pub/foia/ig/sbse/sbse-04-0911-083.pdf.
IRS's Business Consultants Audit Technique Guide
Perhaps in response to the consulting industry's explosive growth, IRS has updated its Business Consultants Audit Technique Guide (ATG). In addition to reflecting new developments, the ATG has been expanded to include a new section addressing income-shifting and substance versus form.
Following is an overview of some of the key areas agents are instructed to examine when reviewing a consultant's return.
Pre-audit. Examiners are instructed to determine that the taxpayer has reported all of the income required to be reported and that the income was reported in the proper period by the proper entity. Among other items, examiners are told to be alert for the following:
· the lack of internal controls;
· the types of books and records the taxpayer maintains, particularly in the area of electronic software;
· the taxpayer's use of bartering;
· the shifting or assignment of income by a taxpayer to a related entity;
· the taxpayer's use of the Internet; and
· the taxpayer's use of a fiscal year end in order to defer income.
Shifting or the assignment of income/substance versus form. Auditors are informed that closely held or one-person personal services corporations, including business consultants, may have assigned or shifted income earned by themselves, as individuals, or their closely held corporations, to another entity in order to reduce their income and/or self-employment taxes. The taxpayer may shift income earned by one entity to a related entity in order to offset net operating losses of a related entity or, in some cases, to circumvent the Roth Individual Retirement Account limitations. Subsequent to this shifting of income, the taxpayer may take a relatively small salary from the entity (that received the assigned income) in relationship to the amount of income shifted.
Examiners are told to review the taxpayer's consulting agreements/contracts and to look for certain information. For example, auditors should look at whether the taxpayer is an S corporation or a partnership and yet the contract requires the services of a particular employee/owner. These concerns are aimed at determining whether there has been a shifting or assignment of income. The ATG discusses various cases on this subject.
The ATG also stresses that how a transaction is taxed depends upon its substance. At the same time, it notes that taxpayers are generally bound by the form in which they choose to cast their transactions.
The ATG notes that the economic substance doctrine has been codified for transactions entered into after Mar. 30, 2010.
Tax years. The ATG alerts auditors to the possibility that a taxpayer may have improperly selected a fiscal tax year other than a calendar year in order to defer income.
Travel. The ATG observes that there is extensive travel inside and outside the U.S. in the consulting field because many consultants have a specialized niche and a broad geographical client base. Auditors are told to look for spousal/family travel and personal travel, particularly out of country.
Independent contractor vs. employee. The ATG observes that the independent contractor versus employee issue is prevalent in the consulting industry. Potential areas of concern include a former employee coming back to a company as an independent consultant with a minimal break in service. This issue has evolved due to the downsizing taking place in the business world over the past decade. Many employers, in an effort to lower costs, have terminated specialized employees and then hired them back as independent consultants. This allows the employer to lower their costs in payroll and employee benefits.
Another potential issue may arise when a consultant obtains a client for which he does not have all the resources himself to fulfill the contract. To meet the client's needs, the consultant forms business relationships (strategic alliances) with other individuals. This can lead to an employee/employer relationship.
Meals and entertainment. Given the considerable travel usually required in the consulting industry, auditors are alerted that there may be sizeable expenses for meals and entertainment. Potential areas of concern noted in the ATG include the proper application of the applicable percentage limitation and the point that travel status meals and entertainment should be limited if not being reimbursed by client. Another area of concern is meals and entertainment in non-travel status.
Personal service corporations. Here, the ATG looks at whether a C corporation meets the definition of a qualifying personal service corporation. The concern is twofold. Some C corporations may want to be considered a personal service corporation in order to be able to use the cash method of accounting. Others may not want to be considered a personal service corporation in order to take advantage of the graduated tax rates.
The Business Consultants Audit Technique Guide can be accessed on the IRS website at http://www.irs.gov/businesses/small/article/0,,id=239724,00.html.
Tax breaks are available for travelers who mix a bit of pleasure with their business travel
Although video conferencing has made inroads in the ranks of business travelers, there still are many situations where it's necessary to travel away-from-home overnight for face-to-face meetings with staff, management, or customers. Businesspeople or professional who must travel for work reasons should keep in mind that they may be able to qualify for a travel bargain by piggybacking a vacation onto an out-of-town business trip. In effect, the business traveler gets free vacation airfare if the trip is set up the right way. And if the travel is undertaken for an employer, a properly set up reimbursement arrangement for the business portion of the trip will be income- and payroll-tax-free. This Practice Alert takes a closer look at how this combination works for domestic travel, along with a review of other business travel strategies that may yield personal savings. It doesn't cover some of the more specialized rules, such as those that apply to travelers in the transportation industry, or the per diem reimbursement rules.
Deductions for trip undertaken primarily for business. A taxpayer who mixes a bit of pleasure with business while away from home nonetheless may deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. (Reg. § 1.162-2(b)(1)) The cost of lodging plus 50% of meals while on business status is deductible. Additionally, if the traveler is an employee reimbursed for all expenses under an accountable plan that requires a timely accounting of the time, place, and business purpose of the travel, plus receipts, the reimbursement is tax-free to the traveler (but the personal portion of the trip yields no tax benefit to the traveler).
Observation: In effect, the 100% deduction for the round-trip travel costs works as a kind of tax subsidy for a personal vacation, or as a partially tax-free perk.
Illustration 1: Jane, a self-employed information technology specialist, flies from the East Coast to Los Angeles for a 5-day business trip. She takes in three days of vacation and sight-seeing after the business part of the trip is over.
Result: Because Jane can deduct the entire air fare, part of her mini-vacation is, in effect, subsidized by the tax break.
Illustration 2: The facts are the same as in illustration (1), except that Jane is employed by a corporation that reimburses her for the business portion of the trip after she submits detailed records and receipts. She pays for the personal portion of the trip (meals and lodging during the three personal days).
Result: Under the accountable plan rules, the reimbursement for the round-trip airfare (as well as for meals and lodging while on business status) is tax-free to Jane, and is not subject to FICA or income tax withholding. (Reg. § 1.62-2(c)(2)(i), Reg. § 1.62-2(d)(1)) That's true even though she took a mini-vacation after her business trip ended. The corporation deducts the travel costs it pays (but only 50% of the cost of meals is deductible).
Illustration 3: The facts are the same as in illustration (2), except that the corporation reimburses Jane for the cost of the entire trip, including the 3-day mini-vacation. Result: Her cost for the personal portion of the trip consists of the tax she pays on the personal portion's value (hotel, meals, etc.), which must be treated as compensation income. The corporation's deduction consists of 50% of the meal costs while Jane is on business travel status, 100% of the round-trip air fare, 100% of the lodging costs while she is on travel status, and (assuming that her entire compensation package is “reasonable”) 100% of the cost of the mini-vacation since that was treated as compensation paid to Jane.
When is a trip treated as undertaken primarily for business? There is no hard-and-fast rule. It depends on the facts and circumstances of each case. The regs do say, however, that the way travelers split their time between business and personal pursuits is “an important factor.” (Reg. § 1.162-2(b)(2))
Illustration 4: Fred works in Atlanta and travels to New Orleans on business. On his way home, he stops in Mobile to visit his parents. During the nine days he is away from home, he spends $1,999 for travel, meals, lodging, and other travel expenses. Had he not stopped in Mobile, Fred would have been away from home for only six days and his trip would have cost only $1,699.
Result: Fred can deduct $1,699 for his trip, including the round-trip transportation to and from New Orleans. The 50% deduction limit applies to his meals while on business status. (IRS Pub. 463 (2010), p. 6)
Observation: As is evident from illustration (4), the personal part of a trip need not occur at the business destination. It can take place on the way home from the business destination (or, for that matter, en route to the business destination).
Caution: Taxpayers who make a stop for personal reasons en route to a business location or on the way home should be sure to keep records of what their round-trip transportation costs would have been without the personal stop.
Saturday night stayovers. Although an employee's out-of-town business chores conclude on Friday, he may extend his business trip to take advantage of a low-priced fare requiring a Saturday night stayover, where the savings in airfare are higher than the costs of the weekend meals and lodging. The employee doesn't pay tax on the reimbursement for his Saturday meal and lodging expenses. (PLR 9237014) In this case, IRS said that under a “common sense test,” payments to the employee for the Saturday stay were deductible if a “hardheaded business person would have incurred such expenses under like circumstances.”
When a personal day may not be a personal day. An away-from-home business trip may straddle a weekend. For example, a traveler may have to attend business meetings on Thursday, Friday, and Monday. He is too far away to travel home and then come back (and besides, the trip back and forth would cost more than staying put), so he spends the weekend relaxing at the out-of-town location. Because he must remain at the location for business reasons, the weekend days (Saturday and Sunday) should under the “common sense test” be treated as business days the expenses for which are deductible (50% of meal costs, 100% for other expenses) or excludible if the traveler is reimbursed under an accountable plan. Note that in the context of foreign travel, IRS Pub. 463 (2010), p. 8, treats such standby days as business days.
Tax break for weekend travel home. A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with family or friends. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location. Note, however, that this rule applies only if the traveler checks out of the out-of-town hotel before leaving for the weekend trip home, and then re-registers. If the traveler retains the hotel room, its cost is deductible, but the deduction for the weekend trip home (i.e., the air fare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location. (IRS Pub. 463 (2010), p. 4)
Tax breaks when spouse or companion comes along. The expenses of a spouse or other companion accompanying a traveler aren't deductible unless (1) the spouse or other companion is an employee of the taxpayer and travels for a bona fide business purpose, and (2) the expenses would otherwise be deductible by the spouse or other companion. (Code Sec. 274(m)(3)) Nevertheless, even if the spouse's or other companion's travel expenses aren't deductible, a tax benefit may still be salvaged from traveling together. That's because the business traveler's deduction isn't based on 50% of the trip expenses. The deduction is based on what it would have cost the taxpayer to travel alone. (Rev Rul 56-168, 1956-1 CB 93) This rule can be a money saver on accommodations. For example, where the cost of a hotel room is $200 for one occupant and $149 for two, a taxpayer on business status may deduct $149 per night, not $100, when he gets a room for two. (IRS Pub. 463 (2010), p. 5)
Similarly, where the taxpayer travels out of town on business via rental car, and his spouse or other companion accompanies him for nonbusiness purposes, the entire cost of the rental is deductible, because the cost would have been the same for the taxpayer even if his spouse did not join him on the trip. (Pohl, Kenneth, (1990) TC Memo 1990-298, PH TCM ¶90298, IRS Pub. 463 (2010), p. 5)
Observation: Checkpoint federal tax subscribers have access to sample client letters related to business travel which can be exported to your word-processor for customization. See Client Letter ¶ 2130 (business travel away from home within the U.S.), and Client Letter ¶ 2133 (deducting the costs of a spouse on a business trip). Publication 463 referenced in this article can be viewed on the IRS website at http://www.irs.gov/pub/irs-pdf/p463.pdf
IRS Increases Mileage Rate
In recognition of recent gas price increases, the IRS has increased the optional standard mileage rates for the final six months of 2011. The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011 through December 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011.
The optional business standard mileage rate is used to computer the deductible costs of operating an automobile for business use instead if tracking actual costs, but taxpayers also have the option of calculating the actual costs of using their vehicle. The optional business standard mileage rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The full report can be located on the IRS website at
For more information on this increase or other tax issues, contact Postlethwaite & Netterville.
Treasury Form TD F 90-22.1 - the Foreign Bank Account Reporting (FBAR) return - due date is June 30
Who Must File an FBAR
United States persons are required to file an FBAR if:
- The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
- The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
United States person means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
Exceptions to the Reporting Requirement
Exceptions to the FBAR reporting requirements can be found in the FBAR Instructions. There are filing exceptions for the following United States persons or foreign financial accounts:
- Certain foreign financial accounts jointly owned by spouses;
- United States persons included in a consolidated FBAR;
- Correspondent/nostro accounts;
- Foreign financial accounts owned by a governmental entity;
- Foreign financial accounts owned by an international financial institution;
- IRA owners and beneficiaries;
- Participants in and beneficiaries of tax-qualified retirement plans;
- Certain individuals with signature authority over, but no financial interest in, a foreign financial account;
- Trust beneficiaries; and
- Foreign financial accounts maintained on a United States military banking facility.
Look to the FBAR instructions to determine eligibility for an exception and to review exception requirements &
For an investment in a partnership that has interests in foreign accounts to come under these reporting requirements, the partner would have to own a greater than 50% interest in the partnership.
The IRS has stepped up enforcement in this area. Failure to file this form can result in significant penalties
Congress repeals expansion of Form 1099 reporting
Businesses across the country, as well as certain property owners, can breathe a sigh of relief. Why? Congress has repealed provisions in last year's Patient Protection and Affordable Care Act (PPACA) and the Small Business Jobs Act (SBJA) that expanded the mandatory filing for Form 1099. After months of setbacks, President Obama signed the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 into law on April 14.
The repealed requirements
Generally, individuals, businesses and other organizations must fulfill certain information reporting requirements. The purpose is to help taxpayers prepare their income tax returns and the IRS to assess the accuracy and completeness of filed returns.
Issuing a Form 1099 is one type of information reporting. The general requirement is that payments totaling $600 or more in a year to a single payee in the course of the payor’s trade or business must be reported on the form and submitted to the payee and the IRS. However, there are some major exceptions, including payments to most corporations, as well as payments for merchandise and similar items.
The PPACA included a provision that broadly expanded the mandatory filing of Form 1099, beginning for payments made after Dec. 31, 2011. The provision generally would have required businesses to report any payments to vendors that exceeded $600 in a calendar year.
The SBJA introduced another expansion of Form 1099 reporting that took effect for payments made after Dec. 31, 2010. This expansion would have affected taxpayers who receive rental income from a “passive” real estate investment, such as a vacation home. Previously, only taxpayers in the trade or business of rental properties were required to file Form 1099, but, under the new law, the IRS considered taxpayers who own one or more rental properties to be a “business” for Form 1099 purposes.
These expanded requirements likely would have created significant burdens for businesses and many property owners by dramatically increasing the number of necessary filings. In addition, affected businesses and property owners would have been responsible for obtaining taxpayer identification numbers from every payee that required a Form 1099. If a business was unable to obtain this information, it would have been required to withhold federal income taxes from payments to that payee and forward them to the government.
Filing burdens eased, but questions may remain
The repeal of the expanded Form 1099 reporting requirements means that businesses and property owners need not worry about drowning in paperwork or risking IRS penalties for failing to file a newly required Form 1099.
Eight Tips from the IRS to Help You Determine if Your Gift is Taxable
If you give someone money or property during your life, you may be subject to the federal gift
tax. Most gifts are not subject to the gift tax, but the IRS has put together the following eight tips to help you determine if your gift is taxable.
1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2010, the annual exclusion is $13,000.
2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.
3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.
4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:
- Gifts that are not more than the annual exclusion for the calendar year,
- Tuition or medical expenses you pay directly to a medical or educational institution for someone,
- Gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
6. Gift Splitting - you and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.
7. Gift Tax Returns - you must file a gift tax return on Form 709, if any of the following apply:
- You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
- You and your spouse are splitting a gift.
- You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
- You gave your spouse an interest in property that will terminate due to a future event.
8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone's tuition or medical expenses.
For more information, please contact a P&N professional.
Taxes and Identity Theft
It pays to be choosy when it comes to disclosing personal information. Identity thieves have used stolen personal data to access financial accounts, run up charges on credit cards and apply for new loans. The IRS is aware of several identity theft scams involving taxes or scammers posing as the IRS itself. The IRS does not use e-mail to contact taxpayers about issues related to their accounts. If you have any doubt whether a contact from the IRS is authentic, call a P&N professional or the IRS at 800-829-1040 to confirm it.
What are your chances for being audited?
IR 2011-27; 2010 Data Book (Pub 55B)
IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2010 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits), and what categories of returns IRS is focusing its resources on, as well as data on other enforcement activities, such as collections. The figures and percentages in this article compare returns filed in calendar year 2009 and audited in FY 2010 to returns filed in calendar year 2008 and audited in FY 2009.
What are the chances of being audited? Of the 142,823,105 total individual income tax returns with a filing requirement, 1,581,394 were audited. This works out to roughly 1.1%, a bit higher than the 1% rate for the previous year. Of the total number of individual income tax returns audited in FY 2010, 473,999 (30%) were for returns with an earned income tax credit (EITC) claim, a decrease from the 35.64% of all audited returns for FY 2009.
Only 21.7% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners; the bulk of the audits (about 78.3%) were correspondence audits. The percentages for FY 2009 were 22.8% and 77.1% respectively.
Following are selected audit rates for individuals not claiming the EITC:
· For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 4.7% of returns were audited in FY 2010, up from 4.2% in FY 2009.
· For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.3% of returns were audited in FY 2010, versus 3.2% in FY 2009.
· Of the returns showing farm (Schedule F) income, .4% were audited in FY 2010 versus .3% in FY 2009.
· For returns showing total positive income of $200,000 to $1 million, 2.5% of returns not showing business activity were audited, and 2.9% of returns showing business activity were audited; for FY 2009, these percentages were 2.3% and 3.1% respectively.
· For FY 2010, the audit rate for returns with total positive income of $1 million or more was 8.4%, a substantial increase from the 6.4% rate in FY 2009.
Not surprisingly, examination coverage increases for higher income earners. For example, the percentage was .71% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (up from .67% for FY 2009), and 1.92% for those with $200,000 to $500,000 of AGI (up slightly from 1.86% for FY 2009). Exam coverage increased to 6.67% for those with at least $1 million but less than $5 million of AGI (up from 5.35% for FY 2008). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more.
The audit rates for business returns were as follows:
· For all corporate returns other than Form 1120S, 1.4%, versus 1.3% for the year before.
· For small corporations with total assets of: $250,000 to $1 million, 1.4%; $1–$5 million, 1.7%; and $5–10 million, 3%. For FY 2009, the percentages were, respectively, 1.3%, 1.8%, and 2.7%.
· For large corporations with total assets of $10 million or more, the overall audit rate was 16.6%, up from 14.5% for FY 2009. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 13.4% for those with total assets of $10–$50 million (up from 10.1% for FY 2009); 16.1% for those with $250–$500 million (versus 15.8% for FY 2009); 45.3% for those with $5–20 billion (down from 48.7% for FY 2009), and 98% for those with $20 billion or more (down from 100% for FY 2009).
· For partnership and S corporation returns, the audit rate was .4%, the same as for the year before.
IRS's activity on other fronts. Here's a roundup of some of the other valuable information carried in the new IRS Data Book.
Number of returns filed. The number of partnership returns filed (Form 1065) dropped by 1.6%, and the number of S corporation returns (Form 1120S) grew by .3%. The number of C or other corporation (e.g., REMIC, REIT, RIC) returns dropped by 4.8%.
The number of individual income tax returns (Forms 1040, 1040A, 1040EZ, 1040EZ-T) dropped 6.7%, from FY 2008 to FY 2009, but in FY 2010 the percentage fell only 2% from the year before, reflecting some improvement in economic activity.
Math errors on individual returns. Of the roughly 10.5 million math error notices that IRS sent out relating to the 2009 return, 60.8% were attributable to the making work pay credit (MWPC), which was a refundable tax credit based on earned income and was available to taxpayers in 2009 and 2010.
Of the total math error notices, 9% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax), 4.9% related to exemption number/amount, 4.4% related to the EITC, 4.1% related to the standard/itemized deduction, and 1.3% related to the first-time homebuyer credit.
Penalties. In FY 2009, IRS assessed 27.1 million civil penalties against individual taxpayers, up from 26.387 million civil penalties assessed in the previous year. Of the FY 2010 assessments, the “top three” penalties in percentage terms were 57.3% for failure to pay, 27.3% for underpayment of estimated tax, and 13% for delinquency. On the business side, there were a total of 1,145,931 civil penalty assessments (up from 970,098 for the year before), and 42.1% of these assessments was for either failure to pay or underpayment of estimated tax.
Offers-in-compromise. In FY 2010 57,000 offers-in-compromise were received by IRS (versus 52,000 for FY 2009), and 14,000 were accepted (11,000 for the year before).
Criminal cases. IRS initiated 4,706 criminal investigations in FY 2010. There were 3,034 referrals for prosecution and 2,184 convictions. Of those sentenced, 81.5% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2009, IRS initiated 4,121 criminal investigations, and there were 2,570 referrals for prosecution. Of those sentenced, 81.2% were incarcerated.
The IRS 2010 Data Book can be viewed at http://www.irs.gov/pub/irs-soi/10databk.pdf.
Spring forward this weekend
Many parts of the country will begin Daylight Saving Time by setting clocks ahead one hour on Sunday, March 13 at 2:00 a.m. Hourly workers who are on the job when the time change occurs will lose an hour of pay. They may also lose overtime pay if the loss of the hour prevents them from going above the 40-hour mark during the week. Employers that choose to pay their workers for the full eight-hour shift do not need to include the additional hour's pay in the calculation of the employee's regular rate of pay for overtime purposes. However, the employer may not credit the extra hour's pay toward overtime since it is not compensation for time worked. Daylight saving time is not observed in Arizona (with the exception of the Navajo Nation), Hawaii, Puerto Rico, the Virgin Islands, American Samoa, and Guam. Daylight Saving Time will end this year on November 6.
Careful allocation between 1245 and 1250 property can boost first-year depreciation writeoffs
Businesses interested in maximizing their first-year writeoffs have a powerful incentive to place new assets in service this year. Under Code Sec. 168(k), they can write off 100% of the cost of qualifying assets in the placed-in-service year. Most building costs are long-lived Code Sec. 1250 property and generally are ineligible for the 100% first-year writeoff, unless they are qualified leasehold improvement property. However, as this Practice Alert explains, enterprises or investors that build, renovate or expand commercial properties this year still can wind up with big first-year writeoffs. That's because many of the assets installed in a commercial building may in fact be Code Sec. 1245 personal property (as opposed to Code Sec. 1250 realty) and, as such, may be eligible for 100% bonus first-year depreciation.
Best terms ever for bonus depreciation. In general, an asset qualifies for the 100% bonus depreciation allowance if:
· It is property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by Code Sec. 197; qualified leasehold improvement property; or certain water utility property;
· It is acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (placed in service before Jan. 1, 2013 for certain long production property and aircraft); and
· Its original use commences with the taxpayer. (Code Sec. 168(k)(5))
RIA recommendation: The 100% first-year writeoff rules are not likely to be extended. So, for most qualifying property, taxpayers that want to front-load their depreciation deductions are well advised to make their moves early enough so that the assets are placed in service by the end of this year.
Sec. 1250 vs. Sec. 1245 property. Code Sec. 1250 property that is a non-residential building (as well as its structural components) generally is depreciated over a 39-year recovery period using the straight-line method. Because of that long recovery period, it is not eligible for bonus depreciation (except for assets that are qualified leasehold improvement property under Code Sec. 168(k)(3) and Reg. § 1.168(k)-1(c)). It also can't be expensed under Code Sec. 179. Some types of land improvements are, however, recoverable over a 15-year MACRS period, even though they are Code Sec. 1250 property, and may be eligible for the 100% bonus first-year depreciation deduction under Code Sec. 168(k). Additionally, most types of Code Sec. 1245 property (by and large, tangible personal property) are eligible for bonus first-year depreciation under Code Sec. 168(k) (and may be expensed under Code Sec. 179).
In the depreciation context, there is no stand-alone definition of “personal property.” Instead, the regs say the term is defined the same way as “tangible personal property” is defined under Reg. § 1.48-1(c), which deals with property eligible for the repealed investment tax credit (ITC). (Reg. § 1.1245-3(b)(1))
Cost segregation studies. Commercial building owners often conduct detailed cost segregation studies or analyses to distinguish items of section 1245 property from items of section 1250 property, and to find shorter-lived (15-year) section 1250 property. Following a number of pro-taxpayer court decisions, these studies have been aggressive in designating property as section 1245 property. Such studies will be valuable assets for businesses or investors that build, renovate, or expand commercial properties this year.
RIA observation: The leading case on the issue is Hospital Corp of America & Subsidiaries, (1997) 109 TC 21, in which the Tax Court held that realty-related property is rapidly depreciable tangible personal property for MACRS purposes (rather than slowly recoverable section 1250 commercial realty) if it would have been classified by the courts as tangible property for ITC purposes. The Tax Court OK'd quick writeoffs for a wide variety of assets, including part of the cost of the primary and secondary electrical distribution systems (as well as a portion of other electrical components), carpeting, vinyl wall coverings, and accordion-style room partitions (see articles in Federal Taxes Weekly Alert 07/31/1997 for details). IRS acquiesced in the Hospital Corp holding that the tests developed under the ITC are applicable in determining whether an asset is a structural component for purposes of ACRS and MACRS depreciation. IRS nonacquiesced, however, to the way in which the Tax Court applied this principle to specific items. (Acq and nonacq 1999-35 IRB 314, as corrected by Ann. 99-116, 1999-52 IRB 763)
Valuable guidance in IRS Field Directives. IRS has published a series of Field Directives on the planning and examination of cost segregation issues in various industries (restaurant, casino, retail, pharmaceutical, auto dealership — see links below to IRS website) that categorize a wide array of assets as either section 1250 property that must be written off over 39 years (or over 15 years, if it is a qualifying land improvement) or section 1245 property that is depreciable over 5 or 7 years depending on the type of asset.
The Field Directives say that if a return position for enumerated assets is consistent with the Directives' recommendations, examiners should not make adjustments to the categorization of assets or their recovery period.
RIA observation: The Field Directives all declare that they are not an official pronouncement of the law or IRS's position and cannot be used, cited or relied upon as such. Nevertheless, their classification of assets provides valuable guidance to a broad range of commercial property owners whose buildings are likely to contain many of the types of assets classified as section 1245 property (or 15-year real property) in the Field Directives. And, as a practical matter, it seems unlikely that an auditor will challenge the classification of broad asset types treated as section 1245 property (or 15-year real property) in the Field Directives (e.g., signs and decorative light fixtures), even if the taxpayer is not in one of the industries covered by the Directives.
Assets eligible for quick writeoff. Following are some of the more widely applicable types of assets classified as having shorter recovery periods by the Field Directives, and therefore eligible for a 100% first-year writeoff if they otherwise qualify under Code Sec. 168(k) (see discussion above). The assets generally are recoverable over a 5- or 7-year MACRS period, depending on the type of industry, unless otherwise indicated.
· Canopies and awnings. Readily removable equipment or apparatus used for providing shade or cover. Includes canopies that are largely decorative, but not canopies that are an integral part of a building's structural shell.
· Decorative millwork. This is decorative finished carpentry, examples of which include detailed crown moldings, lattice work placed over finished walls or ceilings, and cabinets. Decorative millwork serves to enhance the overall décor of the business (e.g., restaurant, casino) and is not related to the operation of the building. (Cabinets and counters in a restroom are excluded from this category.)
· Doors. Special lightweight, double action doors installed to prevent accidents in a heavily trafficked area (e.g., “Eliason” type door). For example, flexible doors, clear curtains, or strip curtains used between stock areas and selling areas.
· Electrical outlets. Only those outlets specifically associated with particular items of machinery and equipment (as opposed to operation of the building as a whole).
· Electrical connections. Special electrical connections which are necessary to and used directly with a specific item of machinery or equipment or connections between specific items of individual machinery or equipment, such as dedicated electrical outlets, wiring, conduit, and circuit breakers by which machinery and equipment is connected to the electrical distribution system.
· Facades in interior of building. Facades, such as a false storefronts, made primarily of synthetic materials (foam, fiberglass, cast stone, or glass reinforced concrete) that are not permanently attached and not intended to be permanent. This category would include false balconies, as well as finishes on interior columns that are not permanently attached and not intended to be permanent.
· Fire protection equipment. This includes special fire detection or suppression systems directly associated with a piece of equipment. For example, a fire extinguisher designed and used for protection against a particular hazard created by the business activity (e.g., a restaurant).
· Floor coverings. Only if not permanently attached and not intended to be permanent, such as vinyl composition tile installed with strippable adhesive, sheet vinyl, and carpeting.
· Foundations or footings, concrete. Foundations or footings for signs, light poles, canopies and other land improvements have a 15-year MACRS recovery period.
· Heating, ventilation, and air conditioning (HVAC). The HVAC unit must meet the sole justification test (i.e., machinery the sole justification for the installation of which is that it is required to meet temperature or humidity requirements that are essential for the operation of other machinery (such as lifts in a car dealership) or the processing of materials or foodstuffs (in a kitchen setting)). A HVAC unit may meet this test even though it incidentally provides for the comfort of employees, or serves, to an insubstantial degree, areas where such temperature or humidity requirements are not essential.
· Kiosks. These are small, often prefabricated, retail outlets that aren't permanent.
· Landscaping & shrubbery. This is landscaping (including irrigation systems) that will be replaced contemporaneously with a related depreciable asset or that will be destroyed when the related depreciable asset is replaced. Examples: depreciable landscaping, shrubbery, trees, plant foliage, or sod placed around a parking lot. Such assets have a 15-year MACRS recovery period.
· Light fixtures, interior. These are light fixtures that are decorative in nature and not necessary for the operation of the building. In other words, if all the decorative lighting were turned off, the other sources of lighting would provide sufficient light for the building. These fixtures are 5- or 7-year MACRS property depending on the type of industry.
· Lighting, exterior. Lighting that highlights only the landscaping or building exterior (but not parking areas or walkways), as well as plant grow lights, and that does not relate to the operation or maintenance of the building.
· Lighting, exterior, pole mounted. Outdoor lighting systems that are pole mounted or freestanding and serve to illuminate sidewalks, parking or recreation areas have a 15-year MACRS recovery period.
· Music and public address (PA) system. Equipment and apparatus used to provide amplified music or sound; also includes wiring. Does not include a PA system that is an integral part of a fire protection system.
· Parking lots. Grade level surface parking areas built of asphalt, brick, concrete, stone or similar material have a 15-year MACRS recovery period. This category includes bumper blocks, curb cuts, curb work, striping, landscape islands, perimeter fences, and sidewalks.
RIA observation: By contrast, in a Coordinated Issue Paper, IRS has said that open-air parking structures providing multi-level parking accessed by a ramp system are structures for Code Sec. 168 purposes and therefore are depreciable over 39 years (see Federal Taxes Weekly Alert 08/06/2009). IRS's stance on stand-alone open-air parking structures is to be contrasted with its more favorable view of parking towers consisting of an auto carousel mechanism and supporting tower structure. PLR 9751010 says that such towers are tangible personal property for purposes of the Code Sec. 168 depreciation rules.
· Poles and pylons. Light poles for parking areas and poles used in concrete footings or bolt-mounted for signage have a 15-year MACRS recovery period.
· Plumbing and similar hookups. Water, gas, or refrigerant hook-ups, if directly connected to appliances or equipment needed for a particular type of business (e.g., restaurant or hair salon).
· Security equipment. Includes electronic article surveillance systems including surveillance cameras, recorders, monitors and related equipment, that have as a primary purpose the minimization of theft in retail areas.
· Signs. Interior and exterior signs used for display or theme identity, and any signage not pertinent to the operation of the building. Does not include exit signs.
· Site grading. All of the following assets have a 15-year MACRS recovery period:
o Clearing, grading, excavating and removal costs directly associated with the construction of sidewalks, parking areas, roadways and other depreciable land improvements.
o Site work, including site drainage, sewers, roads, sidewalks, paving, curbing, general site improvements, site fencing and enclosures, and other site improvements not directly related to the building.
o Patio stonework embedded in the ground and applied to exterior half walls that are not an integral part of the building's structural shell.
· Walls, if movable. These are interior (partition) walls built so that they can be (1) readily removed and remain in substantially the same condition after removal as before, or (2) moved and reused, stored or sold in their entirety.
· Wall coverings. Includes strippable wall paper and vinyl that causes no damage to the underlying wall or wall surface.
· Window accessories. Window accessories such as drapes, curtains, louvers, post-construction tinting that is readily removable, and interior decorative theme decor.
Reference Links on IRS website:
· Cost segregation field directive on casinos http://www.irs.gov/businesses/article/0,,id=134685,00.html.
· Cost segregation field directive on restaurants http://www.irs.gov/businesses/article/0,,id=134686,00.html.
· Cost segregation field directive on retail industries http://www.irs.gov/businesses/article/0,,id=134687,00.html.
· Cost segregation field directive on pharmaceutical and biotechnology industries http://www.irs.gov/businesses/article/0,,id=153520,00.html.
· Cost segregation field directive on the auto dealership industry http://www.irs.gov/businesses/article/0,,id=180233,00.html.
Taxpayers have various ways to check on their refund status [IRS Tax Tip 2011-39]
Taxpayers who have filed a federal tax return and are entitled to a refund have several options to check on the status of their refund. IRS says the fastest and easiest way to check on the status of a refund is to access "Where's My Refund?" on the agency website. If a taxpayer e-files, refund information becomes available 72 hours after IRS acknowledges receipt of the return. If a paper return is filed, refund information will generally be available three to four weeks after mailing the return. When checking on the status of a refund, a taxpayer must enter either a Social Security number or an Individual Taxpayer Identification Number, filing status, and the exact whole dollar refund amount shown on the tax return. As described by IRS, once the personal information is entered, several responses are possible, including: acknowledgement that the return was received and is in processing; the mailing date or direct deposit date of the refund; or notice that IRS could not deliver the refund due to an incorrect address. Further information is located at http://www.irs.gov/newsroom/article/0,,id=107704,00.html.
Important Facts About Capital Gains and Losses
Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss. Here are ten facts from the IRS about gains and losses and how they can affect your Federal incoem tax return:
- Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
- When you sell a capital asset, the difference between the amount you sell it for and your basis--which is usually what you paid for it--is a capital gain or a capital loss.
- You must report all capital gains.
- You may deduct capital losses only on investment property, not on property held for personal use.
- Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
- If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.
- The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.
- If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
- If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
- Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040
For more information about reporting capital gains and losses, see the Schedule D instructions, Publication 550, Investment Income and Expenses or Publication 17, Your Federal Income Tax or check with one of P&N's tax professionals.
Here is What to Do If You Are Missing a W-2
Before you file your 2010 tax return, you should make sure you have all the needed documents including all your Forms W-2. You should receive a Form W-2, Wage and Tax Statement, from each of your employers. Employers have until January 31, 2011 to send you a 2010 Form W-2 earnings statement.
If you haven't received your W-2, follow these four steps:
1. Contact your employer If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.
2. Contact the IRS If you do not receive your W-2 by February 14th, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, city and state, including zip code, Social Security number, phone number and have the following information:
- Employer's name, address, city and state, including zip code and phone number
- Dates of employment
- An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2010. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.
3. File your return You still must file your tax return or request an extension to file April 18, 2011, even if you do not receive your Form W-2. If you have not received your Form W-2 by the due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible. There may be a delay in any refund due while the information is verified.
4. File a Form 1040X On occasion, you may receive your missing W-2 after you filed your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.
Form 4852, Form 1040X, and instructions are available at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Tax Relief Act
After weeks of intense negotiations between the White House and Congressional leaders, Congress passed and President Obama signed into law a two-year extension of soon-to-have-expired Bush-era tax cuts, including extension of current individual tax rates and capital gains/dividend tax rates. Called the most sweeping tax law in a decade, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (H.R. 4853), was approved by the Senate on December 15, 2010 and by the House on December 16, 2010. The new law is, however, much more than just an extension of existing tax rates. The new law also provides a temporary across-the-board payroll tax cut for wage earners, a retroactive AMT “patch,” estate tax relief, education and energy incentives and many valuable incentives for businesses, including 100 percent bonus depreciation and extension of many temporary tax breaks. The following highlights many of the key incentives in the new law. As always, please call or email your accountant for more details.
Tax rates. Among the most valuable tax breaks for individuals in the new law are a two-year extension of individual income tax rate reductions and a payroll tax cut. Both will deliver immediate tax savings starting in January 2011. The new law keeps in place the current 10, 15, 25, 28, 33, and 35 percent individual tax rates for two years, through December 31, 2012. If Congress had not passed this extension, the individual tax rates would have jumped significantly for all income levels. The new law also extends full repeal of the limitation on itemized deductions and the personal exemption phaseout for two years. Married couples filing jointly will also benefit from extended provisions designed to ameliorate the so-called marriage penalty.
Payroll tax cut. The payroll tax cut is designed to get more money into workers’ paychecks and to encourage consumer spending. Effective for calendar year 2011 only, the employee share of the OASDI portion of Social Security taxes is reduced from 6.2 percent to 4.2 percent up to the taxable wage base of $106,800. Self-employed individuals also benefit. Self-employed individuals will pay 10.4 percent on self-employment income up to the wage base (reduced from the normal 12.4 percent rate). The payroll cut replaces the Making Work Pay credit, which reduced income tax withholding for wage earners in 2009 and 2010. The payroll tax cut, unlike the credit, does not exclude any individuals based on their earnings and has the potential of significantly higher benefits (with a maximum payroll tax reduction of $2,136 on wages at or above the $106,800 level as compared to a maximum available $800 Making Work Pay credit for married couples filing jointly ($400 for single individuals)).
Capital gains/dividends. The new law also extends reduced capital gains and dividend tax rates. Like the individual rate cuts, the extended capital gains and dividend tax rates are temporary and will expire after 2012 unless Congress intervenes. In the meantime, however, for two years (2011 and 2012), individuals in the 10 and 15 percent rate brackets can take advantage of a zero percent capital gains and dividend tax rate. Individuals in higher rate brackets will enjoy a maximum tax rate of 15 percent on capital gains, as opposed to a 20 percent rate that had been scheduled to replace it and with dividends taxed at income tax rates. Only net capital gains and qualified dividends are eligible for this special tax treatment. If you have any questions about your capital gain/dividend income, please contact our office.
AMT patch. More and more individuals are finding themselves falling under the alternative minimum tax (AMT) because of the way the AMT is structured. To prevent the AMT from encroaching on middle income taxpayers, Congress has routinely enacted so-called “AMT patches.” The new law continues this trend by providing higher exemption amounts and other targeted relief.
More incentives. Along with all these incentives, the new law extends many popular but temporary tax breaks. Extended for 2011 and 2012 are:
- $1,000 child tax credit
- Enhanced earned income tax credit
- Adoption credit with modifications
- Dependent care credit
- Deduction for certain mortgage insurance premiums
The new law also extends retroactively some other valuable tax incentives for individuals that expired at the end of 2009. These incentives are extended for 2010 and 2011 and include:
- State and local sales tax deduction
- Teacher’s classroom expense deduction
- Charitable contributions of IRA proceeds
- Charitable contributions of appreciated property for conservation purposes
Bonus depreciation. Bonus depreciation is intended to help businesses depreciate certain new equipment purchases faster against their taxable income, thereby encouraging businesses to invest in more equipment. Bonus depreciation allows businesses to recover the costs of certain capital expenditures more quickly than under ordinary tax depreciation schedules. Businesses can use bonus depreciation to immediately write off a percentage of the cost of depreciable property. The new law makes 100 percent bonus depreciation available for qualified investments made after September 8, 2010 and before January 1, 2012. It also continues bonus depreciation, albeit at 50 percent, on property placed in service after December 31, 2011 and before January 1, 2013. There are special rules for certain longer-lived and transportation property. Additionally, certain taxpayers may claim refundable credits in lieu of bonus depreciation. 100 percent bonus depreciation is a valuable tax break and businesses have only a short window to take advantage of it. Please contact our office so we can help you plan for 100 bonus depreciation.
Code Sec. 179 expensing. Along with bonus depreciation, the new law also provides for enhanced Code Sec. 179 expensing for 2012. Under current law, the Code Sec. 179 dollar and investment limits are $500,000 and $2 million, respectively, for tax years beginning in 2010 and 2011. The new law provides for a $125,000 dollar limit (indexed for inflation) and a $500,000 investment limit (indexed for inflation) for tax years beginning in 2012 (but not after).
Research credit. Many businesses urged Congress to make the research credit permanent after the credit expired at the end of 2009. While this proposal enjoyed significant support in Congress, its cost was deemed prohibitive. Instead, Congress extended the research tax credit for two years, for 2010 and 2011.
More incentives. Other valuable business incentives in the new law include extensions of:
- 100 percent exclusion of gain from qualified small business stock
- Transit benefits parity
- Work Opportunity Tax Credit (with modifications)
- New Markets Tax Credit (with modifications)
- Differential wage credit
- Brownfields remediation
- Active financing exception/look-through treatment for CFCs
- Tax incentives for empowerment zones
- Special rules for charitable deductions by corporations and other businesses
- And more
In 2010, Congress had been expected to pass comprehensive energy legislation including new and enhanced tax incentives. For a number of reasons, an energy bill did not pass. However, the new law extends some energy tax breaks for businesses. The new law also extends, but modifies, a popular energy tax break for individuals.
Businesses. For businesses, one of the most valuable energy incentives is the Code Sec. 1603 cash grant in lieu of a tax credit program. This incentive encourages the development of alternative energy sources, such as wind energy. Other business energy incentives extended by the new law include excise tax and other credits for alternative fuels, percentage depletion for oil and gas from marginal wells, and other targeted incentives.
Individuals. Individuals who made energy efficiency improvements to their homes in 2009 or 2010 are likely familiar with the Code Sec. 25C energy tax credit. This credit rewards individuals who install energy efficient furnaces or add insulation, or make other improvements to reduce energy usage. The new law extends the credit through 2011 but reduces some of its benefits. Although 2010 is soon over, there may still be time to take advantage of the more generous credit. Please contact our office.
The Tax Code includes a number of incentives to encourage individuals to save for education expenses. In 2009, Congress enhanced the Hope education credit and renamed it the American Opportunity Tax Credit (AOTC). Like many other incentives, the AOTC was temporary. The new law extends it for two years, through 2012. Along with the AOTC, the new law also extends:
- Higher education tuition deduction
- Student loan interest deduction
- Exclusion for employer-provided educational assistance
- Enhanced Coverdell education savings accounts
- Special rules for certain scholarships
Estate and gift taxes
The federal estate tax, along with federal gift and generation skipping transfer (GST) taxes, was significantly overhauled in 2001. At that time, Congress set in motion a gradual reduction of the estate tax until abolishing it for 2010. Under budget rules, however, those changes could extend for only 10 years; starting in 2011, the estate tax had been scheduled to revert to its pre-2001 levels of 55 percent and a $1 million exclusion.
Estate tax. The new law revives the estate tax, but with a maximum estate tax rate of 35 percent with a $5 million exclusion. The revived estate tax is in place for decedents dying in 2011 and 2012. The new law gives estates the option to elect to apply the estate tax at the 35 percent/$5 million levels for 2010 or to apply carryover basis for 2010. The new law also allows “portability” between spouses of the maximum exclusion and extends some other taxpayer-friendly provisions originally enacted in 2001.
This far-reaching multi-billion dollar tax package affects almost every taxpayer. Keep in mind that many of its provisions are temporary. It is important to plan early to maximize your tax savings. Please contact P&N if you have any questions.
Small Business Jobs Act of 2010
The Small Business Jobs Act of 2010 (SBJA) has just been passed by Congress, and it benefits more than just small businesses. It also provides tax-saving opportunities for larger businesses and individuals — including small-business investors, the self-employed and employees saving for retirement.
CHANGES AFFECTING BUSINESSES:
Section 179 expensing. SBJA helps small-business owners invest in their own businesses by increasing the Internal Revenue Code Sec. 179 expensing election limit. For tax years beginning in 2010 and 2011, the limit will now be $500,000, with a dollar-for-dollar phase-out starting when purchases for the year exceed $2 million.
SBJA also temporarily expands the definition of eligible property to include qualified leasehold-improvement, restaurant and retail-improvement property. The maximum amount of such property that can be expensed is $250,000, which reduces the $500,000 eligible limit.
Bonus depreciation. Another depreciation-related provision extends the special allowance for certain property, generally if acquired in calendar year 2010. Businesses can recover the costs of qualifying depreciable property more quickly by immediately deducting 50% of the cost. Bonus depreciation isn’t subject to any asset purchase limits, so businesses ineligible for Sec. 179 expensing can take advantage of it.
Property that qualifies for bonus depreciation includes tangible property with a recovery period of 20 years or less, computer software purchased by the business, water utility property, and qualified leasehold improvement property.
Other key changes. Here are some additional changes businesses should be aware of:
- New five-year carryback of the general business credit,
- Increase in the start-up expenditures deduction,
- Shortening of the S corporation built-in gains period, and
- Removal of cell phones from the definition of “listed property” that’s subject to tighter substantiation requirements and special depreciation rules.
- For payments received after 2009, persons receiving rent income of $600 must file Form 1099.
CHANGES AFFECTING INDIVIDUALS:
Exclusion on small business stock gains. To make investing in certain small businesses more attractive, SBJA temporarily increases the qualified small business (QSB) stock gain exclusion. The exclusion will be 100% for stock acquired after SBJA’s enactment date (that is, the date the president signs it into law) and before Jan. 1, 2011, that’s held for at least five years. Additionally, the act eliminates the alternative minimum tax (AMT) preference item on such gain, making it tax free for AMT purposes as well.
Self-employment tax. If you’re self-employed, SBJA permits you to deduct for 2010 self-employment tax purposes any costs incurred in 2010 for health insurance for you and your spouse, dependents and children age 26 or under.
Roth 457(b) plans. If you’re a government employee who participates in a 457(b) plan, be aware that SBJA may allow your employer to start providing you the option to designate some or all of your contributions as Roth contributions. The contributions won’t reduce your taxable income, but you won’t have to pay any tax on qualified distributions.
401(k), 403(b) or 457(b) rollovers to Roth accounts. Under SBJA, your 401(k), 403(b) or 457(b) plan may allow (but isn’t required to allow) you to roll any portion of your pretax account balance into a Roth account. The amount of the rollover would be includible in your taxable gross income — except to the extent it’s the return of any after-tax contributions. If the rollover is made in 2010, you can elect to pay the tax over a two-year period in 2011 and 2012.
How you can benefit
Whether or not you’re a small-business owner, you may be able to reap significant tax savings by taking advantage of the opportunities SBJA offers. P&N would be pleased to help you determine exactly how you can benefit.
IRS Redesigns Form 941
The IRS recently released a revised Form 941, Employer's Quarterly Federal Tax Return. They are requiring employers to use Revised Form 941 to report payroll taxes, beginning with the second quarter. Using this form, employers can report new hires that qualify them for tax exemptions under the Hiring Incentives to Restore Employment (HIRE) Act, enacted earlier this year.
IRS Issues Guidance on Small Business Health Insurance Tax Credit
The IRS has issued new guidance to make it easier for small businesses to determine whether they are eligible for the new health insurance tax credit under the Affordable Care Act. Small businesses who provide health insurance for employees are eligible for credits of up to 35% of non-elective contributions they make on behalf of their employees for insurance premiums. To qualify as a small business, the employer must have fewer than 25 full-time equivalent employees (FTEs), and the average annual wages of its employees must be less than $50,000 per FTE.
Automatic Revocation of the Tax Exempt Status
Starting on Monday, May 15, the IRS began revoking tax-exempt status for those organizations who failed to file an information return in the Form 990 series for three consecutive years. Those organizations that have lost their exemption will need to reapply with the IRS. The organizations should also note that any income received between May 15 and reinstatement of their exemption may be taxable.
Tax on indoor tanning services
The Patient Protection Act imposes a 10% tax on amounts paid for indoor tanning services (new IRC 5000B). Like a sales tax, the tax will be collected from the person tanning when payment for the tanning services is made. The provision applies to services performed on or after July 1, 2010.
This hiring incentive represents a less expensive alternative to President Obama's FY 2011 budget proposal of a $5,000 tax credit for every new employee hired by a small business in 2010, capped at $500,000 for any one employer. The president also proposed reimbursing small businesses on Social Security taxes paid on any wage increases for moderate income employees.