tag:blogger.com,1999:blog-76259684105553646612024-02-07T02:30:00.278-07:00Tax, Fishing, and Other RamblingsAn ongoing discussion of Income Taxes (especially legislation, timing, tax credits, and international issues) and Fishing (fly fishing, spin fishing, and even just standing on the dock).Andrew Gantman, CPA MBA MBThttp://www.blogger.com/profile/16621218226920063369noreply@blogger.comBlogger43125tag:blogger.com,1999:blog-7625968410555364661.post-9085681111871145072023-11-26T20:20:00.000-07:002023-11-26T20:20:19.979-07:00US Citizens/Residents Exercising Stock Options May be Exempt from Korean Income Taxation<p>Not long ago,
I came across a situation in which a US citizen/resident (“Client”) exercised
stock options to acquire stock in a South Korean corporation (“KoreaCo”). KoreaCo granted the options to Client as
compensation for services that Client performed in the US during a prior year. Client has never been an employee of KoreaCo
and performed no services in Korea.</p><p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;"><o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;">Around the time
of the option exercise, the Korean professionals involved insisted that Client
was subject to Korean taxation on the excess of the stock’s fair market value (“FMV”)
over the cost of exercising the option.<span style="mso-spacerun: yes;"> </span>(i.e.,
treating the “bargain purchase price” as income)<o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;">For the sake
of discussion, assume that the excess was equal to $1 million, which would have
given rise to an approximate Korean tax of $200,000.<o:p></o:p></p><p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;"><br /></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt; margin-left: 67.5pt; margin-right: 0in; margin-top: 0in; text-indent: -67.5pt;"><b>Issue</b>:<span style="mso-spacerun: yes;"> </span><span style="mso-tab-count: 1;"> </span></p><p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt; margin-left: 67.5pt; margin-right: 0in; margin-top: 0in; text-indent: -67.5pt;">Is
Client liable for the $200,000 of Korean income tax noted above?<o:p></o:p></p><p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt; margin-left: 67.5pt; margin-right: 0in; margin-top: 0in; text-indent: -67.5pt;"><br /></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt; margin-left: 67.5pt; margin-right: 0in; margin-top: 0in; text-indent: -67.5pt;"><b>Brief answer</b>:<span style="mso-tab-count: 1;"> </span></p><p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;">No. The <i>United States - Republic Of Korea
Income Tax Convention</i> (the “Treaty”) prohibits Korea from taxing Client on
the $1 million.</p><p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;"><br /></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;"><b>Discussion:<o:p></o:p></b></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;">Tax treaties
are bilateral (i.e., applying to both parties) agreements between countries
that can override one or both countries’ domestic tax rules to the extent that
taxpayers qualify for their benefits.<span style="mso-spacerun: yes;">
</span>These benefits often allow applicable taxpayers to be subject to lower
rates of tax on income associated with one or both countries.<span style="mso-spacerun: yes;"> </span>This could involve reduced withholding rates
on things like dividends paid by a domestic corporation to a non-domestic
shareholder (e.g., withholding 10% instead of 30%), or even full exemption or
certain types of income.<o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;">According to
the Korean professionals involved in the matter, Korean tax law states that if an
individual in Korea exercises stock options for a payment of 100x when the
stock has a FMV of 300x, such transaction gives rise to a taxable “gain” of 200x,
and a corresponding tax of 40x (20% rate x 200x).<o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;">However, the
Treaty overrides this otherwise-applicable Korean tax rule as follows.<span style="mso-spacerun: yes;"> </span>The text of the Treaty and the Technical
Explanation are available at <a href="https://www.irs.gov/businesses/international-businesses/korea-tax-treaty-documents"><b>https://www.irs.gov/businesses/international-businesses/korea-tax-treaty-documents</b></a>.
<o:p></o:p></p>
<p class="MsoListParagraph" style="line-height: normal; margin-bottom: 6.0pt; mso-list: l0 level1 lfo1; text-indent: -.25in;"></p><ul style="text-align: left;"><li>Treaty Article 1 (Taxes
Covered), paragraph (1)(b) provides that the Treaty covers Korean Income Tax.<span style="mso-spacerun: yes;"> </span>Per the Korean tax professionals, the tax on
the “gain” is a tax covered by the Treaty.</li></ul><ul style="text-align: left;"><li>Treaty Article 6 (Source of
Income), paragraph (6) provides in relevant part that </li></ul><ul style="text-align: left;"><ul><li><i style="text-indent: -0.25in;">Income received by an individual for his performance of labor
or personal services, whether as an employee or in an independent capacity, or
for furnishing the personal services of another person and income received by a
corporation for furnishing the personal services of its employees or others,
shall be treated as income from sources within one of the Contracting States
only to the extent that such services are performed in that Contracting State.</i></li></ul></ul><!--[if !supportLists]--><o:p></o:p><p></p>
<p class="MsoListParagraph" style="line-height: normal; margin-bottom: 6.0pt; mso-list: l0 level1 lfo1; text-indent: -.25in;"><o:p></o:p></p>
<p class="MsoListParagraph" style="line-height: normal; margin-bottom: 6.0pt; mso-list: l0 level1 lfo1; text-indent: -.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;"> ·<span style="font: 7.0pt "Times New Roman";"> </span></span></span>The Treaty’s <i>Technical
Explanation</i>, Article 6 (Source of Income), paragraph 1 elaborates that a
Contracting State (e.g., Korea) may tax a resident of the other Contracting
State (e.g., United States) only on income from sources within the
first-mentioned Contracting State (as long as the resident is not a citizen of
the first-mentioned Contracting State).<o:p></o:p></p>
<p class="MsoListParagraph" style="line-height: normal; margin-bottom: 6.0pt; mso-list: l0 level1 lfo1; text-indent: -.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span>Treaty Article 16 (Capital
Gains), paragraph (1) further clarifies that a US resident recognizing gains in
Korea that (a) don’t relate to real property and (b) who does not have a Korean
Permanent Establishment (i.e., a fixed place of business in Korea, pursuant to
Article 9) is exempt from Korean taxation.<o:p></o:p></p>
<p class="MsoListParagraph" style="line-height: normal; margin-bottom: 6.0pt; mso-list: l0 level1 lfo1; text-indent: -.25in;"><!--[if !supportLists]--><span style="font-family: Symbol; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7.0pt "Times New Roman";"> </span></span></span>Treaty Article 18
(Independent Personal Services) also indicates that Client is exempt from
Korean taxation on the “gain” because Client was not in Korea for any amount of
time even if Client did perform independent services. <o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;">Based on the
above, it is clear that the Treaty exempts Client’s “gain” on the option
exercise and that the otherwise-applicable corresponding 20% Korean tax does
not apply.<o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;"><b>Caveat</b>:<span style="mso-spacerun: yes;"> </span>the above discussion relates solely to Korean
income tax imposed on the economic “gain” and not any other taxes (e.g., stamp
duties and social insurance contributions).<span style="mso-spacerun: yes;">
</span>This article is meant solely for general awareness purposes and should
not be relied upon as professional advice.<span style="mso-spacerun: yes;">
</span>Proper treatment of each situation will depend on the specific facts and
circumstances and the reader should seek out their own professional advice.<o:p></o:p></p>
<p class="MsoNormal" style="line-height: normal; margin-bottom: 6.0pt;"><b>Interesting
aside</b>:<span style="mso-spacerun: yes;"> </span>Would payment of the $200,000
Korean tax would be eligible for a foreign tax credit?<span style="mso-spacerun: yes;"> </span>Unfortunately, the answer is <b><u>no</u></b>
because that Korean tax is not truly a tax imposed on Client since the Treaty
prohibits Korea from imposing it in this example.<span style="mso-spacerun: yes;"> </span>To qualify for the foreign tax credit, payment
must be <b>compulsory</b> for it to be considered a “tax.”<o:p></o:p></p>Andrew Gantman, CPA MBA MBThttp://www.blogger.com/profile/16621218226920063369noreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-34416922867705676942020-02-05T14:07:00.000-07:002020-02-05T14:07:16.764-07:00Nonresident alien or Resident alien for 2019 US income tax purposes (Part 1 of a series)<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;"><br /></span>
<br />
<div style="margin-bottom: 13.5pt; margin-left: 0in; margin-right: 0in; margin-top: 0in;">
<span style="font-family: inherit; font-size: large;"><b><i>Nonresident alien or Resident
alien for 2019 US income tax purposes (Part 1 of a series)</i></b><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit;"><span style="white-space: pre-wrap;">An intimidating question for those with little or no experience with US tax rules. Even if they don’t completely understand the rules, they do understand that their resident/nonresident status may have a big impact on them.</span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit;"><span style="white-space: pre-wrap;"><i>Caveat: There are multiple additional implications beyond US federal income tax (e.g., immigration status, disclosure requirements, state/local taxation, gift/estate taxation, etc.) that are beyond the scope of this writing. Be sure to check back soon, as I plan to discuss these areas in more detail in the future.</i></span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit;"><span style="white-space: pre-wrap;"><b>KEY POINTS</b></span><o:p></o:p></span></div>
<div role="presentation" style="margin-bottom: .0001pt; margin-bottom: 0in; margin-left: .5in; margin-right: 0in; margin-top: 0in; mso-list: l31 level1 lfo37; tab-stops: list .5in; text-indent: -.25in; vertical-align: baseline;">
</div>
<ul>
<li><span style="font-family: inherit;"><span style="-webkit-text-decoration-skip: none; text-decoration-skip-ink: none; white-space: pre-wrap;"><u>Talk to an experienced tax professional about these and related rules and how best to approach them.</u></span><span style="white-space: pre-wrap;"> For example, aliens can be both nonresident <b><i>and</i></b> resident in their first/last resident year (“dual-status”) so determining residency start/end dates can be very important.<o:p></o:p></span></span><br />
<div role="presentation" style="margin: 0in 0in 0in 0.5in; text-indent: -0.25in; vertical-align: baseline;">
</div>
</li>
<li><span style="font-family: inherit; white-space: pre-wrap;">Rules are mostly mechanical, but can be complicated. </span></li>
<li><span style="font-family: inherit; white-space: pre-wrap;">Only applies to US <b style="text-indent: -24px;"><i>non</i></b><span style="text-indent: -24px;">citizens. US citizens are </span><b style="text-indent: -24px;"><i>not</i></b><span style="text-indent: -24px;"> “aliens,” so resident/nonresident status is moot.</span></span></li>
<li><span style="font-family: inherit;">Internal Revenue Code <span style="text-indent: -0.25in; white-space: pre-wrap;"><a href="https://www.law.cornell.edu/uscode/text/26/871"><span style="color: #1155cc; font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="text-decoration-skip-ink: none;">section 871</span></span></a></span><span style="text-indent: -0.25in; white-space: pre-wrap;"> imposes income tax on </span><i style="text-indent: -0.25in; white-space: pre-wrap;">nonresident alien individuals</i><span style="text-indent: -0.25in; white-space: pre-wrap;">.</span></span></li>
<li><span style="text-indent: -0.25in; white-space: pre-wrap;"><span style="font-family: inherit;"><span style="white-space: normal;"><a href="https://www.law.cornell.edu/cfr/text/26/1.871-1"><span style="color: #1155cc; font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="-webkit-text-decoration-skip: none; text-decoration-skip-ink: none; white-space: pre-wrap;">Treas. Reg. section 1.871-1</span></span></a></span><span style="white-space: pre-wrap;">(a) provides that</span><span style="white-space: pre-wrap;"> <i>r</i></span><span style="white-space: pre-wrap;"><i>esident alien individuals</i></span><span style="white-space: pre-wrap;"> are generally taxable the same as US citizens.</span></span></span></li>
<li><span style="text-indent: -0.25in; white-space: pre-wrap;"><span style="font-family: inherit; white-space: pre-wrap;"><span style="white-space: normal;"><a href="https://www.law.cornell.edu/uscode/text/26/7701"><span style="color: #1155cc; font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="-webkit-text-decoration-skip: none; text-decoration-skip-ink: none; white-space: pre-wrap;">Section 7701</span></span></a></span><span style="white-space: pre-wrap;">(b)(30) provides the definitions of “resident alien” and “nonresident alien.”</span></span></span></li>
<li><span style="text-indent: -0.25in; white-space: pre-wrap;"><span style="white-space: pre-wrap;"><span style="font-family: inherit; white-space: pre-wrap;">In general</span></span></span></li>
<ul>
<li><span style="font-family: inherit;"><span style="text-indent: -0.25in; white-space: pre-wrap;">A </span><b style="text-indent: -0.25in; white-space: pre-wrap;"><i>resident alien</i></b><span style="text-indent: -0.25in; white-space: pre-wrap;"> an individual that meets </span><u style="text-indent: -0.25in; white-space: pre-wrap;">any</u><span style="text-indent: -0.25in; white-space: pre-wrap;"> of the following requirements:</span></span></li>
<ul>
<li><span style="font-family: inherit;"><span style="text-indent: -0.25in; white-space: pre-wrap;">US lawful permanent resident at any time during such calendar year. </span><span style="text-indent: -0.25in; white-space: pre-wrap;">Also known as the “green card” test.</span></span></li>
<li><span style="font-family: inherit;"><span style="text-indent: -0.25in; white-space: pre-wrap;">Meets the “substantial presence test” of </span><span style="text-indent: -0.25in; white-space: pre-wrap;"><a href="https://www.law.cornell.edu/uscode/text/26/7701"><span style="color: #1155cc; font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="text-decoration-skip-ink: none;">section 7701</span></span></a></span><span style="text-indent: -0.25in; white-space: pre-wrap;">(b)(3).</span></span></li>
<li><span style="text-indent: -0.25in; white-space: pre-wrap;"><span style="font-family: inherit;">Makes specific election to be treated as a resident alien.</span></span></li>
</ul>
<li><span style="white-space: pre-wrap;"><span style="font-family: inherit;">A <b style="text-indent: -24px;"><i>nonresident alien</i></b><span style="text-indent: -24px;"> is an individual that is </span><u style="text-indent: -24px;">not</u><span style="text-indent: -24px;"> a resident alien.</span></span></span></li>
</ul>
</ul>
<div class="MsoNormal" style="margin-bottom: 12.0pt;">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit;"><span style="white-space: pre-wrap;"><b>DISCUSSION</b></span><o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit;"><a href="https://www.law.cornell.edu/uscode/text/26/871"><span style="color: #1155cc; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="-webkit-text-decoration-skip: none; text-decoration-skip-ink: none; white-space: pre-wrap;">Section 871</span></span></a><span style="white-space: pre-wrap;"> imposes income tax on nonresident alien individuals. Income subject to US tax is generally limited to income from US sources (e.g., covered by <a href="https://www.law.cornell.edu/uscode/text/26/861"><span style="color: #1155cc; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="text-decoration-skip-ink: none;">section 861</span></span></a> – services performed in the US, interest/dividends from US payors, etc.). Tax rate is generally 30% for income not connected with US business and the regular graduated tax rate for income that is connected with a US business.<o:p></o:p></span></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit;"><a href="https://www.law.cornell.edu/cfr/text/26/1.871-1"><span style="color: #1155cc; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="-webkit-text-decoration-skip: none; text-decoration-skip-ink: none; white-space: pre-wrap;">Treas. Reg. section 1.871-1</span></span></a><span style="white-space: pre-wrap;">(a) provides</span><o:p></o:p></span><br />
<ul>
<li><span style="text-indent: -0.25in; white-space: pre-wrap;"><span style="font-family: inherit;">“Resident alien individuals are, in general, taxable the same as citizens of the United States; that is, a resident alien is taxable on income derived from all sources, including sources without the United States.”</span></span></li>
</ul>
</div>
<div class="MsoNormal">
<i style="font-family: inherit; white-space: pre-wrap;">Note: A nonresident alien </i><span style="font-family: inherit; white-space: pre-wrap;"><i>may also be subject to a 30% tax rate on capital gains if they are (1)</i></span><span style="font-family: inherit; white-space: pre-wrap;"><i><span style="font-family: "calibri" , sans-serif; font-size: 11pt;"> </span>not effectively connected with a </i></span><i style="font-family: inherit; white-space: pre-wrap;">US business, and (2) the nonresident alien is present in the US for 183 or more </i><i style="font-family: inherit; white-space: pre-wrap;">days during the tax year. If the nonresident </i><i style="font-family: inherit; white-space: pre-wrap;">alien satisfies the 183-day test, all US-source capital gains and losses for the </i><i style="font-family: inherit; white-space: pre-wrap;">year are considered, even if they occurred while the individual was not present </i><i style="font-family: inherit; white-space: pre-wrap;">in the US.</i></div>
<div class="MsoNormal" style="margin-bottom: 12.0pt;">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit;"><span style="-webkit-text-decoration-skip: none; text-decoration-skip-ink: none; white-space: pre-wrap;"><b><u>Resident Alien status requirement #1 – Lawful Permanent Resident / Green Card</u></b></span></span></div>
<div class="MsoNormal">
<ul>
<li><span style="font-family: inherit;"><span style="font-family: "arial" , sans-serif;"><a href="https://www.law.cornell.edu/uscode/text/26/7701"><span style="color: #1155cc; font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="-webkit-text-decoration-skip: none; text-decoration-skip-ink: none; white-space: pre-wrap;">Section 7701</span></span></a></span><span style="white-space: pre-wrap;">(b)(1) and (2)</span></span></li>
<li><span style="font-family: inherit; white-space: pre-wrap;">See also <span style="font-family: "arial" , sans-serif;"><a href="https://www.irs.gov/forms-pubs/about-publication-519"><span style="color: #1155cc; font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="text-decoration-skip-ink: none;">IRS Publication 519</span></span></a></span> (US Tax Guide for Aliens)</span></li>
</ul>
<div>
<span style="font-family: inherit; white-space: pre-wrap;">This test is straightforward. </span></div>
</div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit; white-space: pre-wrap;">You are a lawful permanent resident of the US at any time if you have been given the privilege, according to the immigration laws, of residing permanently in the US as an immigrant. You generally have this status if the <a href="https://www.uscis.gov/"><span style="color: #1155cc; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="text-decoration-skip-ink: none;">US Citizenship and Immigration Services</span></span></a> (“USCIS”) (or its predecessor organization, “INS”) issued you an alien registration card, also known as a “green card.” You continue to have resident status under this test unless the status is taken away from you or is administratively or judicially determined to have been abandoned.<o:p></o:p></span></div>
<div class="MsoNormal" style="margin-bottom: 12.0pt;">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit;"><span style="-webkit-text-decoration-skip: none; text-decoration-skip-ink: none; white-space: pre-wrap;"><b><u>Resident Alien status requirement #2 – Substantial Presence Test</u></b></span><o:p></o:p></span></div>
<div class="MsoNormal">
<ul>
<li><span style="font-family: inherit;"><span style="font-family: "arial" , sans-serif;"><a href="https://www.law.cornell.edu/uscode/text/26/7701"><span style="color: #1155cc; font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="-webkit-text-decoration-skip: none; text-decoration-skip-ink: none; white-space: pre-wrap;">Section 7701</span></span></a></span><span style="white-space: pre-wrap;">(b)(3)</span></span></li>
<li><span style="font-family: inherit; white-space: pre-wrap;">See also <span style="font-family: "arial" , sans-serif;"><a href="https://www.irs.gov/forms-pubs/about-publication-519"><span style="color: #1155cc; font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="text-decoration-skip-ink: none;">IRS Publication 519</span></span></a></span></span></li>
</ul>
<span style="font-family: inherit; white-space: pre-wrap;">This test is more detailed, but still </span><i style="font-family: inherit; white-space: pre-wrap;">mostly</i><span style="font-family: inherit; white-space: pre-wrap;"> mechanical with relatively little left to interpretation.</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit;"><span style="white-space: pre-wrap;">For purposes of this test:</span></span><br />
<ul>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">“US” generally includes all 50 US states, DC, and a few other geographies, but <i>not</i> US possessions/territories or US airspace.</span></li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">When counting days of presence in the US, you are treated as present in the US on any day you are physically present in the country at <i>any</i> time during the day, with certain exceptions. Do <b><i>not</i></b> count the following as days of presence in the US for the substantial presence test.</span></li>
<ul>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Days you commute to work in the US from a residence in Canada or Mexico if you regularly commute from Canada or Mexico.</span></li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Days you are in the US for less than 24 hours when you are in transit between two places outside the US.</span></li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Days you are in the US as a foreign vessel’s crewmember, under a NATO visa, or are otherwise exempt as set forth in </span><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;"><a href="https://www.irs.gov/forms-pubs/about-publication-519"><span style="color: #1155cc; font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="text-decoration-skip-ink: none;">IRS Publication 519</span></span></a></span><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">.</span></li>
</ul>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Maintaining a “closer connection” to a foreign country in which you have a tax home may allow you to be an NRA even if you do meet the substantial presence test.</span></li>
</ul>
</div>
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<span style="font-family: inherit; white-space: pre-wrap;">You will be considered a US resident for tax purposes (for 2019) </span><span style="font-family: inherit; white-space: pre-wrap;">if you meet the substantial presence test for calendar year 2019. To meet this test, </span><span style="font-family: inherit; white-space: pre-wrap;">you must be physically present in the US on at least:</span><br />
<ul>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">31 days during 2019, </span><b style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;"><i>and</i></b></li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">183 days during the 3-year </span>period that includes 2019, 2018, and 2017, counting:</li>
<ul>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">All the days you were present </span>in 2019, and</li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;"><sup><span style="font-size: 7pt;">1</span></sup></span><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">/</span><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;"><sub><span style="font-size: 7pt;">3</span></sub></span><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;"> of the days you were present </span>in 2018, and</li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;"><sup><span style="font-size: 7pt;">1</span></sup></span><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">/</span><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;"><sub><span style="font-size: 7pt;">6</span></sub></span><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;"> of the days you were present </span>in 2017.</li>
</ul>
</ul>
</div>
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<span style="font-family: inherit;"><br /></span></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<span style="font-family: inherit;"><span style="white-space: pre-wrap;"><b>Closer Connection</b></span><span style="white-space: pre-wrap;"> – Even if you meet the substantial presence test, you can be treated as a nonresident alien if you meet all of the following criteria and file <a href="https://www.irs.gov/pub/irs-pdf/f8840.pdf"><span style="color: #1155cc; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="text-decoration-skip-ink: none;">Form 8840</span></span></a> (subject to certain limitations):<o:p></o:p></span></span><br />
<ul>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Are present in the US for </span>less than 183 days during the year,</li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Maintain a tax home in </span>a foreign country during the year, and</li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Have a closer connection </span>during the year to one or more foreign countries in which you have a tax home than to the US.</li>
</ul>
</div>
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<b style="font-family: inherit; white-space: pre-wrap;"><u><br /></u></b>
<b style="font-family: inherit; white-space: pre-wrap;"><u>Resident Alien status requirement #3 – Affirmative Election</u></b></div>
<div class="MsoNormal">
<ul>
<li><span style="font-family: inherit;"><span style="text-indent: -24px;"><a href="https://www.law.cornell.edu/uscode/text/26/7701"><span style="color: #1155cc; font-family: "times new roman" , serif; mso-fareast-font-family: "Times New Roman"; mso-fareast-theme-font: major-fareast;"><span style="-webkit-text-decoration-skip: none; text-decoration-skip-ink: none; white-space: pre-wrap;">Section 7701</span></span></a></span><span style="text-indent: -24px; white-space: pre-wrap;">(b)(4)</span></span></li>
</ul>
<span style="font-family: inherit; white-space: pre-wrap;">An individual may also make a “first year election” to be treated </span><span style="font-family: inherit; white-space: pre-wrap;">as a resident alien for the portion of their first year of US presence in the following </span><span style="font-family: inherit; white-space: pre-wrap;">circumstances.</span><br />
<ul>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Not a US resident under the green card test or the substantial presence test for the election year,</span></li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Wasn't a US resident under </span>either test for the calendar year immediately before the election year,</li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Is a US resident under </span>the substantial presence test for the calendar year immediately after the election year,</li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Is present in the US for </span>at least 31 consecutive days in the election year (“31-day period”), and</li>
<li><span style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Is present in the US for </span>at least 75% of the days during the period beginning on the first day of the 31-day period and ending on the last day of the election year.</li>
</ul>
</div>
<div class="MsoNormal" style="margin-bottom: 12.0pt;">
<span style="font-family: inherit;"><br /></span>
<b style="color: blue; font-family: inherit; white-space: pre-wrap;">Key Takeaways</b></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<ul>
<li><span style="color: blue;"><b style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Determining Nonresident </b><b style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">alien vs. Resident alien status is very fact-dependent and can be very complicated.</b></span></li>
<li><b style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;"><span style="color: blue;">Only applies to US noncitizens. US citizens are taxed on their worldwide income.</span></b></li>
<li><span style="color: blue;"><b style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Individuals sometimes </b><b style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">can <i>choose</i> their status.</b></span></li>
<li><span style="color: blue;"><b style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">Mistakes in this area </b><b style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">can be <u>very</u> costly, be sure to </b><b style="font-family: inherit; text-indent: -0.25in; white-space: pre-wrap;">discuss with an experienced international tax professional.</b></span></li>
</ul>
</div>
<br />
<ul>
</ul>
Andrew Gantman, CPA MBA MBThttp://www.blogger.com/profile/16621218226920063369noreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-52951304326810475972020-01-21T22:17:00.000-07:002020-02-03T19:49:45.711-07:00Withholding on prizes and awards to US nonresidents<br />
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<b><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Prizes and awards to US nonresidents
may be subject to US income tax withholding!</span></b><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12.0pt;">The long arm of the US tax law can
reach unexpected places.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Did you know that awarding prizes (cash
or otherwise) to non-US persons might require you to withhold US federal income
taxes and pay them over to the US Treasury?<span style="mso-spacerun: yes;">
</span>Moreover, failure to do so may result in the person who should have withheld
those taxes being responsible for the unpaid tax!<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , serif; font-size: 12.0pt;">If that weren’t enough, that
requirement can also apply to those who simply <i>administer</i> the prize/award
program for someone else (even if they aren’t the one choosing the winners).<o:p></o:p></span></div>
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<u><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Example</span></u><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><o:p></o:p></span></div>
<ul type="disc">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">COMPANY
(based in the US) runs an entertainment website.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">The
website has visitors from around the world.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">COMPANY
periodically runs promotions on its website where visitors can win cash
prizes by solving puzzles and being randomly chosen from correct
entries. <o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Entrants
are not required to make purchases to enter/win, nor are they required to
perform any services to receive their prize.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">ALEX
(age 15, a nonresident alien individual) wins a $1000 prize.<o:p></o:p></span></li>
</ul>
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<u><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Issue </span></u><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><o:p></o:p></span></div>
<ul type="disc">
<li class="MsoNormal" style="mso-list: l3 level1 lfo2; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">How
much must COMPANY withhold in US income taxes from its $1000 prize payment
to ALEX?<o:p></o:p></span></li>
</ul>
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<u><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Short Answer</span></u><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><o:p></o:p></span></div>
<ul type="disc">
<li class="MsoNormal" style="mso-list: l2 level1 lfo3; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">COMPANY
must withhold $300 in US taxes from ALEX's prize and send the remaining
$700 to ALEX.<o:p></o:p></span></li>
</ul>
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<u><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Brief Discussion</span></u><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><o:p></o:p></span></div>
<ul type="disc">
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Answer
above is <b><u>not</u></b> intuitive. ALEX does not have
any obvious taxable connection to the US and solved the puzzle in his own
home.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">COMPANY
must determine the <i><u>nature</u></i> of the transaction
taking place because it controls the “<i><u>source</u></i>” (i.e., US
source vs. foreign source) of the income, which often dictates whether US
income taxes must be withheld by the payor.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><i><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Quick
synopsis of US income tax withholding requirements (to the extent
applicable here):</span></i><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><o:p></o:p></span></li>
<ul type="circle">
<li class="MsoNormal" style="mso-list: l1 level2 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 1.0in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><a href="https://www.law.cornell.edu/uscode/text/26/1441" target="_blank">Section 1441</a> applies to withholding of tax on
nonresident aliens. It requires (among other things) that those having
control over most types of income being paid to nonresidents withhold tax
from those payments.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l1 level2 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 1.0in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><a href="https://www.law.cornell.edu/uscode/text/26/871" target="_blank">Section 871</a> sets the tax rate (and thus the <a href="https://www.law.cornell.edu/uscode/text/26/1441" target="_blank">section 1441</a> withholding rate) at 30% on US source income of nonresident alien
individuals.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l1 level2 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 1.0in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Source of income is mostly covered by <a href="https://www.law.cornell.edu/uscode/text/26/861" target="_blank">sections 861</a> -
<a href="https://www.law.cornell.edu/uscode/text/26/865" target="_blank">865</a>.<i> Key authorities relevant here:</i><o:p></o:p></span></li>
<ul type="square">
<li class="MsoNormal" style="mso-list: l1 level3 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 1.5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><a href="https://www.law.cornell.edu/uscode/text/26/861" target="_blank">Section 861</a> – Compensation for services performed in
the US are US source.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l1 level3 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 1.5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><a href="https://www.law.cornell.edu/uscode/text/26/862" target="_blank">Section 862</a> – Compensation for services performed
outside of the US are foreign source.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l1 level3 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 1.5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><a href="https://www.law.cornell.edu/uscode/text/26/863" target="_blank">Section 863</a> – Permits Treasury to promulgate
regulations as to source for items of income not specified in section
861 and 862.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l1 level3 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list 1.5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><a href="https://www.law.cornell.edu/cfr/text/26/1.863-1" target="_blank">Treas. Reg. section 1.863-1</a>(d)(2) provides that the
source of income from prizes and awards is determined by the residence
of the payor.<o:p></o:p></span></li>
</ul>
</ul>
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">ALEX
winning the prize was <u>not</u> a direct result of solving the puzzle, it
was a result of being chosen from all correct entries received by
COMPANY. As such, ALEX was not being compensated for services
performed by him for COMPANY's benefit. Thus, <a href="https://www.law.cornell.edu/uscode/text/26/861" target="_blank">sections 861</a> and <a href="https://www.law.cornell.edu/uscode/text/26/862" target="_blank">862</a>
do not apply to this issue.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">As
a result, <a href="https://www.law.cornell.edu/cfr/text/26/1.863-1" target="_blank">Treas. Reg. section 1.863-1</a>(d)(2) treats ALEX’s prize as US source
income because COMPANY (the payor) is a US person.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">Section
871 thus requires 30% withholding on the $1000 prize.<o:p></o:p></span></li>
<li class="MsoNormal" style="mso-list: l1 level1 lfo4; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "times new roman" , serif; font-size: 12.0pt;">If
the person administering prize payments has (per <a href="https://www.law.cornell.edu/uscode/text/26/1441" target="_blank">section 1441</a>) control over
the payments, that person is a considered a “withholding agent” (defined
under <a href="https://www.law.cornell.edu/uscode/text/26/7701" target="_blank">section 7701</a>(a)(16)) and may be held responsible for the failure to
withhold.<o:p></o:p></span></li>
</ul>
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<span style="font-family: "times new roman" , serif; font-size: 12.0pt;"><o:p> Full text of Internal Revenue Code available at </o:p></span><a href="https://www.law.cornell.edu/uscode/text/26">https://www.law.cornell.edu/uscode/text/26</a></div>
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<br />Andrew Gantman, CPA MBA MBThttp://www.blogger.com/profile/16621218226920063369noreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-68187662030432326282015-12-16T02:10:00.002-07:002015-12-16T10:45:47.500-07:00Protecting Americans from Tax Hikes Act of 2015On the evening of December 15, 2015, the House released the text of the Protecting Americans from Tax Hikes Act of 2015 (Division Q of House amendment #2 to the Senate amendment to H.R. 2029, Military
Construction and Veterans Affairs and Related Agencies Appropriations
Act, 2016). Nickname is the PATH Act.<br />
<br />
The Act is expected to be put up for a vote as early as Thursday, December 17. The 233-page full text can be found at <a href="http://waysandmeans.house.gov/wp-content/uploads/2015/12/PATH_Act_xml.pdf" target="_blank">http://waysandmeans.house.gov/wp-content/uploads/2015/12/PATH_Act_xml.pdf</a> (pdf) and <a href="http://docs.house.gov/billsthisweek/20151214/R121515.006.xml" target="_blank">http://docs.house.gov/billsthisweek/20151214/R121515.006.xml</a> (text) and a 20-page section-by-section summary can be found on the Ways and Means Committee's website at <a href="https://rules.house.gov/sites/republicans.rules.house.gov/files/114/PDF/114-SAHR2029Ex-SxS.pdf" target="_blank">https://rules.house.gov/sites/republicans.rules.house.gov/files/114/PDF/114-SAHR2029Ex-SxS.pdf</a>.<br />
<br />
I recommend reviewing the Ways and Means summary, but the outline is as follows. Further review to come...<br />
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<ul>
<li>DIVISION Q—PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015</li>
<ul><ul>
<li>Sec. 1. Short title, etc.</li>
</ul>
<li>TITLE I—EXTENDERS</li>
<ul>
<li>Subtitle A—Permanent extensions</li>
<ul>
<li>PART 1—TAX RELIEF FOR FAMILIES AND INDIVIDUALS</li>
<ul>
<li>Sec. 101. Enhanced child tax credit made permanent.</li>
<li>Sec. 102. Enhanced American opportunity tax credit made permanent.</li>
<li>Sec. 103. Enhanced earned income tax credit made permanent.</li>
<li>Sec. 104. Extension and modification of deduction for certain expenses
of elementary and secondary school teachers.</li>
<li>Sec. 105. Extension of parity for exclusion from income for
employer-provided mass transit and parking benefits.</li>
<li>Sec. 106. Extension of deduction of State and local general sales
taxes.</li>
</ul>
<li>PART 2—INCENTIVES FOR CHARITABLE GIVING</li>
<ul>
<li>Sec. 111. Extension and modification of special rule for contributions
of capital gain real property made for conservation purposes.</li>
<li>Sec. 112. Extension of tax-free distributions from individual
retirement plans for charitable purposes.</li>
<li>Sec. 113. Extension and modification of charitable deduction for
contributions of food inventory.</li>
<li>Sec. 114. Extension of modification of tax treatment of certain
payments to controlling exempt organizations.</li>
<li>Sec. 115. Extension of basis adjustment to stock of S corporations
making charitable contributions of property.</li>
</ul>
<li>PART 3—INCENTIVES FOR GROWTH, JOBS, INVESTMENT, AND INNOVATION</li>
<ul>
<li>Sec. 121. Extension and modification of research credit.</li>
<li>Sec. 122. Extension and modification of employer wage credit for
employees who are active duty members of the uniformed services.</li>
<li>Sec. 123. Extension of 15-year straight-line cost recovery for
qualified leasehold improvements, qualified restaurant buildings and
improvements, and qualified retail improvements.</li>
<li>Sec. 124. Extension and modification of increased expensing limitations
and treatment of certain real property as section 179 property.</li>
<li>Sec. 125. Extension of treatment of certain dividends of regulated
investment companies.</li>
<li>Sec. 126. Extension of exclusion of 100 percent of gain on certain
small business stock.</li>
<li>Sec. 127. Extension of reduction in S-corporation recognition period
for built-in gains tax.</li>
<li>Sec. 128. Extension of subpart F exception for active financing income.</li>
</ul>
<li>PART 4—INCENTIVES FOR REAL ESTATE INVESTMENT</li>
<ul>
<li>Sec. 131. Extension of minimum low-income housing tax credit rate for
non-Federally subsidized buildings.</li>
<li>Sec. 132. Extension of military housing allowance exclusion for
determining whether a tenant in certain counties is low-income.</li>
<li>Sec. 133. Extension of RIC qualified investment entity treatment under
FIRPTA.</li>
</ul>
</ul>
<li>Subtitle B—Extensions through 2019</li>
<ul>
<li>Sec. 141. Extension of new markets tax credit.</li>
<li>Sec. 142. Extension and modification of work opportunity tax credit.</li>
<li>Sec. 143. Extension and modification of bonus depreciation.</li>
<li>Sec. 144. Extension of look-thru treatment of payments between related
controlled foreign corporations under foreign personal holding company rules.</li>
</ul>
<li>Subtitle C—Extensions through 2016</li>
<ul>
<li>PART 1—TAX RELIEF FOR FAMILIES AND INDIVIDUALS</li>
<ul>
<li>Sec. 151. Extension and modification of exclusion from gross income of
discharge of qualified principal residence indebtedness.</li>
<li>Sec. 152. Extension of mortgage insurance premiums treated as qualified
residence interest.</li>
<li>Sec. 153. Extension of above-the-line deduction for qualified tuition
and related expenses.</li>
</ul>
<li>PART 2—INCENTIVES FOR GROWTH, JOBS, INVESTMENT, AND INNOVATION</li>
<ul>
<li>Sec. 161. Extension of Indian employment tax credit.</li>
<li>Sec. 162. Extension and modification of railroad track maintenance
credit.</li>
<li>Sec. 163. Extension of mine rescue team training credit.</li>
<li>Sec. 164. Extension of qualified zone academy bonds.</li>
<li>Sec. 165. Extension of classification of certain race horses as 3-year
property.</li>
<li>Sec. 166. Extension of 7-year recovery period for motorsports
entertainment complexes.</li>
<li>Sec. 167. Extension and modification of accelerated depreciation for
business property on an Indian reservation.</li>
<li>Sec. 168. Extension of election to expense mine safety equipment.</li>
<li>Sec. 169. Extension of special expensing rules for certain film and
television productions; special expensing for live theatrical productions.</li>
<li>Sec. 170. Extension of deduction allowable with respect to income
attributable to domestic production activities in Puerto Rico.</li>
<li>Sec. 171. Extension and modification of empowerment zone tax incentives.</li>
<li>Sec. 172. Extension of temporary increase in limit on cover over of rum
excise taxes to Puerto Rico and the Virgin Islands.</li>
<li>Sec. 173. Extension of American Samoa economic development credit.</li>
<li>Sec. 174. Moratorium on medical device excise tax.</li>
</ul>
<li>PART 3—INCENTIVES FOR ENERGY PRODUCTION AND CONSERVATION</li>
<ul>
<li>Sec. 181. Extension and modification of credit for nonbusiness energy
property.</li>
<li>Sec. 182. Extension of credit for alternative fuel vehicle refueling
property.</li>
<li>Sec. 183. Extension of credit for 2-wheeled plug-in electric vehicles.</li>
<li>Sec. 184. Extension of second generation biofuel producer credit.</li>
<li>Sec. 185. Extension of biodiesel and renewable diesel incentives.</li>
<li>Sec. 186. Extension and modification of production credit for Indian
coal facilities.</li>
<li>Sec. 187. Extension of credits with respect to facilities producing
energy from certain renewable resources.</li>
<li>Sec. 188. Extension of credit for energy-efficient new homes.</li>
<li>Sec. 189. Extension of special allowance for second generation biofuel
plant property.</li>
<li>Sec. 190. Extension of energy efficient commercial buildings deduction.</li>
<li>Sec. 191. Extension of special rule for sales or dispositions to
implement FERC or State electric restructuring policy for qualified electric
utilities.</li>
<li>Sec. 192. Extension of excise tax credits relating to alternative
fuels.</li>
<li>Sec. 193. Extension of credit for new qualified fuel cell motor
vehicles.</li>
</ul>
</ul>
</ul>
<li>TITLE II—PROGRAM INTEGRITY</li>
<ul>
<li>Sec. 201. Modification of filing dates of returns and statements
relating to employee wage information and nonemployee compensation to improve
compliance.</li>
<li>Sec. 202. Safe harbor for de minimis errors on information returns and
payee statements.</li>
<li>Sec. 203. Requirements for the issuance of ITINs.</li>
<li>Sec. 204. Prevention of retroactive claims of earned income credit
after issuance of social security number.</li>
<li>Sec. 205. Prevention of retroactive claims of child tax credit.</li>
<li>Sec. 206. Prevention of retroactive claims of American opportunity tax
credit.</li>
<li>Sec. 207. Procedures to reduce improper claims.</li>
<li>Sec. 208. Restrictions on taxpayers who improperly claimed credits in
prior year.</li>
<li>Sec. 209. Treatment of credits for purposes of certain penalties.</li>
<li>Sec. 210. Increase the penalty applicable to paid tax preparers who
engage in willful or reckless conduct.</li>
<li>Sec. 211. Employer identification number required for American
opportunity tax credit.</li>
<li>Sec. 212. Higher education information reporting only to include
qualified tuition and related expenses actually paid.</li>
</ul>
<li>TITLE III—MISCELLANEOUS PROVISIONS</li>
<ul>
<li>Subtitle A—Family tax relief</li>
<ul>
<li>Sec. 301. Exclusion for amounts received under the Work Colleges
Program.</li>
<li>Sec. 302. Improvements to section 529 accounts.</li>
<li>Sec. 303. Elimination of residency requirement for qualified ABLE
programs.</li>
<li>Sec. 304. Exclusion for wrongfully incarcerated individuals.</li>
<li>Sec. 305. Clarification of special rule for certain governmental plans.</li>
<li>Sec. 306. Rollovers permitted from other retirement plans into simple
retirement accounts.</li>
<li>Sec. 307. Technical amendment relating to rollover of certain airline
payment amounts.</li>
<li>Sec. 308. Treatment of early retirement distributions for nuclear
materials couriers, United States Capitol Police, Supreme Court Police, and
diplomatic security special agents.</li>
<li>Sec. 309. Prevention of extension of tax collection period for members
of the Armed Forces who are hospitalized as a result of combat zone injuries.</li>
</ul>
<li>Subtitle B—Real estate investment trusts</li>
<ul>
<li>Sec. 311. Restriction on tax-free spinoffs involving REITs.</li>
<li>Sec. 312. Reduction in percentage limitation on assets of REIT which
may be taxable REIT subsidiaries.</li>
<li>Sec. 313. Prohibited transaction safe harbors.</li>
<li>Sec. 314. Repeal of preferential dividend rule for publicly offered
REITs.</li>
<li>Sec. 315. Authority for alternative remedies to address certain REIT
distribution failures.</li>
<li>Sec. 316. Limitations on designation of dividends by REITs.</li>
<li>Sec. 317. Debt instruments of publicly offered REITs and mortgages
treated as real estate assets.</li>
<li>Sec. 318. Asset and income test clarification regarding ancillary
personal property.</li>
<li>Sec. 319. Hedging provisions.</li>
<li>Sec. 320. Modification of REIT earnings and profits calculation to
avoid duplicate taxation.</li>
<li>Sec. 321. Treatment of certain services provided by taxable REIT
subsidiaries.</li>
<li>Sec. 322. Exception from FIRPTA for certain stock of REITs.</li>
<li>Sec. 323. Exception for interests held by foreign retirement or pension
funds.</li>
<li>Sec. 324. Increase in rate of withholding of tax on dispositions of
United States real property interests.</li>
<li>Sec. 325. Interests in RICs and REITs not excluded from definition of
United States real property interests.</li>
<li>Sec. 326. Dividends derived from RICs and REITs ineligible for
deduction for United States source portion of dividends from certain foreign
corporations.</li>
</ul>
<li>Subtitle C—Additional provisions</li>
<ul>
<li>Sec. 331. Deductibility of charitable contributions to agricultural
research organizations.</li>
<li>Sec. 332. Removal of bond requirements and extending filing periods for
certain taxpayers with limited excise tax liability.</li>
<li>Sec. 333. Modifications to alternative tax for certain small insurance
companies.</li>
<li>Sec. 334. Treatment of timber gains.</li>
<li>Sec. 335. Modification of definition of hard cider.</li>
<li>Sec. 336. Church plan clarification.</li>
</ul>
<li>Subtitle D—Revenue Provisions</li>
<ul>
<li>Sec. 341. Updated ASHRAE standards for energy efficient commercial
buildings deduction.</li>
<li>Sec. 342. Excise tax credit equivalency for liquified petroleum gas and
liquified natural gas.</li>
<li>Sec. 343. Exclusion from gross income of certain clean coal power
grants to non-corporate taxpayers.</li>
<li>Sec. 344. Clarification of valuation rule for early termination of
certain charitable remainder unitrusts.</li>
<li>Sec. 345. Prevention of transfer of certain losses from tax indifferent
parties.</li>
<li>Sec. 346. Treatment of certain persons as employers with respect to
motion picture projects.</li>
</ul>
</ul>
<li>TITLE IV—TAX ADMINISTRATION</li>
<ul>
<li>Subtitle A—Internal Revenue Service reforms</li>
<ul>
<li>Sec. 401. Duty to ensure that Internal Revenue Service employees are
familiar with and act in accord with certain taxpayer rights.</li>
<li>Sec. 402. IRS employees prohibited from using personal email accounts
for official business.</li>
<li>Sec. 403. Release of information regarding the status of certain
investigations.</li>
<li>Sec. 404. Administrative appeal relating to adverse determinations of
tax-exempt status of certain organizations.</li>
<li>Sec. 405. Organizations required to notify Secretary of intent to
operate under 501(c)(4).</li>
<li>Sec. 406. Declaratory judgments for 501(c)(4) and other exempt
organizations.</li>
<li>Sec. 407. Termination of employment of Internal Revenue Service
employees for taking official actions for political purposes.</li>
<li>Sec. 408. Gift tax not to apply to contributions to certain exempt
organizations.</li>
<li>Sec. 409. Extend Internal Revenue Service authority to require
truncated Social Security numbers on Form W–2.</li>
<li>Sec. 410. Clarification of enrolled agent credentials.</li>
<li>Sec. 411. Partnership audit rules.</li>
</ul>
<li>Subtitle B—United States Tax Court</li>
<ul>
<li>PART 1—TAXPAYER ACCESS TO UNITED STATES TAX COURT</li>
<ul>
<li>Sec. 421. Filing period for interest abatement cases.</li>
<li>Sec. 422. Small tax case election for interest abatement cases.</li>
<li>Sec. 423. Venue for appeal of spousal relief and collection cases.</li>
<li>Sec. 424. Suspension of running of period for filing petition of
spousal relief and collection cases.</li>
<li>Sec. 425. Application of Federal rules of evidence.</li>
</ul>
<li>PART 2—UNITED STATES TAX COURT ADMINISTRATION</li>
<ul>
<li>Sec. 431. Judicial conduct and disability procedures.</li>
<li>Sec. 432. Administration, judicial conference, and fees.</li>
</ul>
<li>PART 3—CLARIFICATION RELATING TO UNITED STATES TAX COURT</li>
<ul>
<li>Sec. 441. Clarification relating to United States Tax Court.</li>
</ul>
</ul>
</ul>
<li>TITLE V—TRADE-RELATED PROVISIONS</li>
<ul>
<li>Sec. 501. Modification of effective date of provisions relating to
tariff classification of recreational performance outerwear.</li>
<li>Sec. 502. Agreement by Asia-Pacific Economic Cooperation members to
reduce rates of duty on certain environmental goods.</li>
</ul>
<li>TITLE VI—BUDGETARY EFFECTS</li>
<ul>
<li>Sec. 601. Budgetary effects.</li>
</ul>
</ul>
</ul>
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<![endif]-->Andrew Gantman, CPA MBA MBThttp://www.blogger.com/profile/16621218226920063369noreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-66004890459019382342015-04-20T12:46:00.000-06:002020-02-07T18:32:45.665-07:00WHY do we use the "lag method" to deduct California Franchise Taxes?I once got a call (on behalf of another CPA) asking WHY an accrual-basis taxpayer's deduction for California Franchise Taxes ("CFT") must be taken on the "lag method."<br />
<br />
In short, the "lag method" involves taking a deduction for the CFT in the year <i><b>following </b></i>that in which the taxable income arose from which it was determined (e.g., CFT computed at $100x earned in 20x1, times 8.84% is $8.84x and is deductible in 20x2 for federal income tax purposes). While this rule has applied for many years, the reason for it doesn't seem to be widely known.<br />
<br />
<br />
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In a nutshell, the CFT deduction is subject to the “lag method” for federal tax purposes due to Internal Revenue Code <a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000461----000-.html">section 461(d)</a>. But wait, you say...<a href="https://www.law.cornell.edu/uscode/text/26/461" target="_blank">section 461(d)</a> doesn't say <i>anything</i> about CFT! All it says is the following:</div>
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<br /></div>
<div class="MsoNormal" style="margin-left: 0.5in;">
<i>461(d) Limitation on acceleration of accrual of taxes.</i></div>
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<i> (1) General rule. - In the case of a taxpayer whose taxable income is computed under an accrual method of accounting, to the extent that the time for accruing taxes is earlier than it would be but for any action of any taxing jurisdiction taken after December 31, 1960, then, under regulations prescribed by the Secretary, such taxes shall be treated as accruing at the time they would have accrued but for such action by such taxing jurisdiction. </i></div>
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<i> (2) Limitation. - Under regulations prescribed by the Secretary, paragraph (1) shall be inapplicable to any item of tax to the extent that its application would (but for this paragraph) prevent all persons (including successors in interest) from ever taking such item into account.</i></div>
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So what does the above text have to do with delaying the deduction for CFT? Well, it goes back to the general rules for timing (<a href="https://www.law.cornell.edu/uscode/text/26/461" target="_blank">section 461</a>) as well as a bit of history.</div>
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At the risk of boring some readers, a bit of background is warranted here. Any accrual-basis taxpayer wishing to take an expenditure into account (whether deducting or capitalizing it) must first meet the <i><b>all events</b></i> test. Moreover, such item cannot be taken into account until there is <i><b>economic performance</b></i>.</div>
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<a href="https://www.law.cornell.edu/uscode/text/26/461" target="_blank">Section 461(h)(4)</a> provides that "<i>the all events test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy</i>." In other words, the liability in question (e.g., for the tax owed to California) must (1) be unconditionally due to the person to whom it's owed, and (2) must be able to be reasonably determined as of the day it's to be taken into account (i.e., generally the last day of the tax year).</div>
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<a href="https://www.law.cornell.edu/uscode/text/26/461" target="_blank">Section 461(h)(2)</a> and <a href="https://www.law.cornell.edu/cfr/text/26/1.461-4" target="_blank">Treas. Reg. section 1.461-4</a> provide the rules for determining when economic performance occurs. In the case of taxes, economic performance occurs when those taxes are paid, in keeping with <a href="https://www.law.cornell.edu/cfr/text/26/1.461-4" target="_blank">Treas. Reg. section 1.461-4(g)(6)</a>.</div>
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Based on the <a href="https://www.law.cornell.edu/uscode/text/26/461" target="_blank">section 461</a> rules above, why wouldn't the CFT be properly accrued as of the last day of the year? After all, at year-end isn't (1) the tax reasonably ascertainable, (2) the amount unconditionally due, and (3) assuming estimates were paid throughout the year economic performance was met (or the taxpayer had adopted the recurring item exception of <a href="https://www.law.cornell.edu/uscode/text/26/461" target="_blank">section 461(h)(3)</a> and <a href="https://www.law.cornell.edu/cfr/text/26/1.461-5" target="_blank">Treas. Reg. section 1.461-5</a>)?</div>
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The answer, is currently <i style="color: #38761d;"><b>yes</b></i>, but used to be <i style="color: #990000;"><b>no</b></i>. And that's where the history comes in. </div>
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You see, in the early 1970s, California modified its franchise tax regime which imposed a tax on most corporations doing business in the state. Before this change, a corporation's franchise tax would be measured on the corporation's current-year income, but would apply to the exercise of its corporate franchise (i.e., the right to do business in California) starting with the first day of the corporation's following year. As a result:</div>
<ul>
<li>All events test met (unconditionally due): <b style="color: #990000;">No</b>, because the tax was not owed until the company started exercising its corporate franchise on the first day of the next year.</li>
<li>All events test met (reasonably ascertainable): <b style="color: #38761d;">Yes</b>, since taxable income and the tax rate were <i><b>"knowable"</b></i> at year-end.</li>
<li>Economic performance met: Presumably <b style="color: #38761d;">Yes</b>, as noted above.</li>
</ul>
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In doing so, California took action (after 12/31/1960) that effectively accelerated the accrual date of the CFT. This invoked <a href="https://www.law.cornell.edu/uscode/text/26/461" target="_blank">section 461(d)(1)</a>, thereby negating that acceleration for federal income tax purposes.<br />
<br />
So there you have it.<br />
<br />
<br />
<b>Final notes: </b><br />
<b><br /></b>
<br />
<ul>
<li><b>Too often, taxpayers (and their tax professionals) don't fully understand the rules for claiming deductions in the correct year. That means write-offs are sometimes being taken too early and sometimes too late.</b></li>
<li><b>The CFT tax deduction is just one example of how the "income tax accounting" rules can be surprisingly complicated and counterintuitive.</b></li>
<li><b>I spent considerable time in KMPG's Washington National Tax practice and have personally seen how timing issues can have a multi-million dollar tax impact on someone's tax bill. Moreover, timing issues exist in virtually every industry and area of tax, so knowing the rules and how to apply them will (literally) affect most individuals and businesses. Let me know how I can help you (or your advisor) navigate this often-misunderstood area and avoid costly mistakes!</b></li>
</ul>
<br />
<div>
<br /></div>
<br />
For more discussion of this rule, the following are enlightening.<br />
<ul>
<li>Rev. Rul. 2003-90 (<a href="http://www.irs.gov/pub/irs-drop/rr-03-90.pdf">http://www.irs.gov/pub/irs-drop/rr-03-90.pdf</a>)</li>
<li><i>Wells
Fargo & Co. v. U.S.</i>, No. 09-CV-2764 (D. Minn. 8/10/12) (<a href="http://www.gpo.gov/fdsys/pkg/USCOURTS-mnd-0_09-cv-02764/pdf/USCOURTS-mnd-0_09-cv-02764-5.pdf">http://www.gpo.gov/fdsys/pkg/USCOURTS-mnd-0_09-cv-02764/pdf/USCOURTS-mnd-0_09-cv-02764-5.pdf</a>)</li>
</ul>
</div>
Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7625968410555364661.post-88249700854923778232013-01-01T22:06:00.002-07:002013-01-01T22:06:08.002-07:00House passed Senate version of fiscal cliff bill!On the evening of January 1 2013, the House passed the Senate's version of the fiscal cliff bill. Now it goes to President Obama. Text is at <a href="http://1.usa.gov/UkNnw7">http://1.usa.gov/UkNnw7</a> and runs 154 pages, covering many areas. I suspect that individual tax rates will be getting most of the attention in the press, but there are many other items (e.g., business incentives being extended that had expired; international tax issues, etc.) that are very important.<br />
<br />
Stay tuned for more!<br />
<br />
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<br />
<ul>
<li>TITLE I—GENERAL EXTENSIONS</li>
<ul>
<li>Sec. 101. Permanent extension and modification of 2001 tax relief.</li>
<li>Sec. 102. Permanent extension and modification of 2003 tax
relief.</li>
<li>Sec. 103. Extension of 2009 tax relief.</li>
<li>Sec. 104. Permanent alternative minimum tax relief.</li>
</ul>
<li>TITLE II—INDIVIDUAL TAX EXTENDERS</li>
<ul>
<li>Sec. 201. Extension of deduction for certain expenses of
elementary and secondary school teachers.</li>
<li>Sec. 202. Extension of exclusion from gross income of
discharge of qualified principal residence indebtedness.</li>
<li>Sec. 203. Extension of parity for exclusion from income for
employer-provided mass transit and parking benefits.</li>
<li>Sec. 204. Extension of mortgage insurance premiums treated
as qualified residence interest.</li>
<li>Sec. 205. Extension of deduction of State and local general
sales taxes.</li>
<li>Sec. 206. Extension of special rule for contributions of capital
gain real property made for conservation purposes.</li>
<li>Sec. 207. Extension of above-the-line deduction for
qualified tuition and related expenses.</li>
<li>Sec. 208. Extension of tax-free distributions from
individual retirement plans for charitable purposes.</li>
<li>Sec. 209. Improve and make permanent the provision
authorizing the Internal Revenue Service to disclose certain return and return
information to certain prison officials.</li>
</ul>
<li>TITLE III—BUSINESS TAX EXTENDERS</li>
<ul>
<li>Sec. 301. Extension and modification of research credit.</li>
<li>Sec. 302. Extension of temporary minimum low-income tax
credit rate for nonfederally subsidized new buildings.</li>
<li>Sec. 303. Extension of housing allowance exclusion for
determining area median gross income for qualified residential rental project
exempt facility bonds.</li>
<li>Sec. 304. Extension of Indian employment tax credit.</li>
<li>Sec. 305. Extension of new markets tax credit.</li>
<li>Sec. 306. Extension of railroad track maintenance credit.</li>
<li>Sec. 307. Extension of mine rescue team training credit.</li>
<li>Sec. 308. Extension of employer wage credit for employees
who are active duty members of the uniformed services.</li>
<li>Sec. 309. Extension of work opportunity tax credit.</li>
<li>Sec. 310. Extension of qualified zone academy bonds.</li>
<li>Sec. 311. Extension of 15-year straight-line cost recovery
for qualified leasehold improvements, qualified restaurant buildings and
improvements, and qualified retail improvements.</li>
<li>Sec. 312. Extension of 7-year recovery period for
motorsports entertainment complexes.</li>
<li>Sec. 313. Extension of accelerated depreciation for business
property on an Indian reservation.</li>
<li>Sec. 314. Extension of enhanced charitable deduction for
contributions of food<span style="mso-spacerun: yes;"> </span>inventory.</li>
<li>Sec. 315. Extension of increased expensing limitations and
treatment of certain real property as section 179 property.</li>
<li>Sec. 316. Extension of election to expense mine safety
equipment.</li>
<li>Sec. 317. Extension of special expensing rules for certain
film and television productions.</li>
<li>Sec. 318. Extension of deduction allowable with respect to
income attributable to domestic production activities in Puerto Rico.</li>
<li>Sec. 319. Extension of modification of tax treatment of
certain payments to controlling exempt organizations.</li>
<li>Sec. 320. Extension of treatment of certain dividends of
regulated investment companies.</li>
<li>Sec. 321. Extension of RIC qualified investment entity
treatment under FIRPTA.</li>
<li>Sec. 322. Extension of subpart F exception for active
financing income.</li>
<li>Sec. 323. Extension of look-thru treatment of payments
between related controlled foreign corporations under foreign personal holding
company rules.</li>
<li>Sec. 324. Extension of temporary exclusion of 100 percent of
gain on certain small business stock.</li>
<li>Sec. 325. Extension of basis adjustment to stock of S
corporations making charitable contributions of property.</li>
<li>Sec. 326. Extension of reduction in S-corporation
recognition period for built-in gains tax.</li>
<li>Sec. 327. Extension of empowerment zone tax incentives.</li>
<li>Sec. 328. Extension of tax-exempt financing for New York
Liberty Zone.</li>
<li>Sec. 329. Extension of temporary increase in limit on cover
over of rum excise taxes to Puerto Rico and the Virgin Islands.</li>
<li>Sec. 330. Modification and extension of American Samoa
economic development credit.</li>
<li>Sec. 331. Extension and modification of bonus depreciation.</li>
</ul>
<li>TITLE IV—ENERGY TAX EXTENDERS</li>
<ul>
<li>Sec. 401. Extension of credit for energy-efficient existing
homes.</li>
<li>Sec. 402. Extension of credit for alternative fuel vehicle
refueling property.</li>
<li>Sec. 403. Extension of credit for 2- or 3-wheeled plug-in
electric vehicles.</li>
<li>Sec. 404. Extension and modification of cellulosic biofuel
producer credit.</li>
<li>Sec. 405. Extension of incentives for biodiesel and
renewable diesel.</li>
<li>Sec. 406. Extension of production credit for Indian coal
facilities placed in service before 2009.</li>
<li>Sec. 407. Extension and modification of credits with respect
to facilities producing energy from certain renewable resources.</li>
<li>Sec. 408. Extension of credit for energy-efficient new
homes.</li>
<li>Sec. 409. Extension of credit for energy-efficient
appliances.</li>
<li>Sec. 410. Extension and modification of special allowance
for cellulosic biofuel plant property.</li>
<li>Sec. 411. Extension of special rule for sales or
dispositions to implement FERC or State electric restructuring policy for
qualified electric utilities.</li>
<li>Sec. 412. Extension of alternative fuels excise tax credits.</li>
</ul>
<li>TITLE V—UNEMPLOYMENT</li>
<ul>
<li>Sec. 501. Extension of emergency unemployment compensation
program.</li>
<li>Sec. 502. Temporary extension of extended benefit
provisions.</li>
<li>Sec. 503. Extension of funding for reemployment services and
reemployment and eligibility assessment activities.</li>
<li>Sec. 504. Additional extended unemployment benefits under
the Railroad<span style="mso-spacerun: yes;"> </span>Unemployment Insurance Act.</li>
</ul>
<li>TITLE VI—MEDICARE AND OTHER HEALTH EXTENSIONS</li>
<ul>
<li>Subtitle A—Medicare Extensions</li>
<ul>
<li>Sec. 601. Medicare physician payment update.</li>
<li>Sec. 602. Work geographic adjustment.</li>
<li>Sec. 603. Payment for outpatient therapy services.</li>
<li>Sec. 604. Ambulance add-on payments.</li>
<li>Sec. 605. Extension of Medicare inpatient hospital payment
adjustment for lowvolume hospitals.</li>
<li>Sec. 606. Extension of the Medicare-dependent hospital (MDH)
program.</li>
<li>Sec. 607. Extension for specialized Medicare Advantage plans
for special needs individuals.</li>
<li>Sec. 608. Extension of Medicare reasonable cost contracts.</li>
<li>Sec. 609. Performance improvement.</li>
<li>Sec. 610. Extension of funding outreach and assistance for
low-income programs.</li>
</ul>
<li>Subtitle B—Other Health Extensions</li>
<ul>
<li>Sec. 621. Extension of the qualifying individual (QI)
program.</li>
<li>Sec. 622. Extension of Transitional Medical Assistance
(TMA).</li>
<li>Sec. 623. Extension of Medicaid and CHIP Express Lane
option.</li>
<li>Sec. 624. Extension of family-to-family health information
centers.</li>
<li>Sec. 625. Extension of Special Diabetes Program for Type I
diabetes and for Indians.</li>
</ul>
<li>Subtitle C—Other Health Provisions</li>
<ul>
<li>Sec. 631. IPPS documentation and coding adjustment for
implementation of MSDRGs.</li>
<li>Sec. 632. Revisions to the Medicare ESRD bundled payment
system to reflect findings in the GAO report.</li>
<li>Sec. 633. Treatment of multiple service payment policies for
therapy services.</li>
<li>Sec. 634. Payment for certain radiology services furnished
under the Medicare hospital outpatient department prospective payment system.</li>
<li>Sec. 635. Adjustment of equipment utilization rate for
advanced imaging services.</li>
<li>Sec. 636. Medicare payment of competitive prices for
diabetic supplies and elimination of overpayment for diabetic supplies.</li>
<li>Sec. 637. Medicare payment adjustment for non-emergency
ambulance transports for ESRD beneficiaries.</li>
<li>Sec. 638. Removing obstacles to collection of overpayments.</li>
<li>Sec. 639. Medicare advantage coding intensity adjustment.</li>
<li>Sec. 640. Elimination of all funding for the Medicare
Improvement Fund.</li>
<li>Sec. 641. Rebasing of State DSH allotments.</li>
<li>Sec. 642. Repeal of CLASS program.</li>
<li>Sec. 643. Commission on Long-Term Care.</li>
<li>Sec. 644. Consumer Operated and Oriented Plan program
contingency fund.</li>
</ul>
</ul>
<li>TITLE VII—EXTENSION OF AGRICULTURAL PROGRAMS</li>
<ul>
<li>Sec. 701. 1-year extension of agricultural programs.</li>
<li>Sec. 702. Supplemental agricultural disaster assistance.</li>
</ul>
<li>TITLE VIII—MISCELLANEOUS PROVISIONS</li>
<ul>
<li>Sec. 801. Strategic delivery systems.</li>
<li>Sec. 802. No cost of living adjustment in pay of members of
congress.</li>
</ul>
<li>TITLE IX—BUDGET PROVISIONS</li>
<ul>
<li>Subtitle A—Modifications of Sequestration</li>
<ul>
<li>Sec. 901. Treatment of sequester.</li>
<li>Sec. 902. Amounts in applicable retirement plans may be
transferred to designated Roth accounts without distribution.</li>
</ul>
<li>Subtitle B—Budgetary Effects</li>
<ul>
<li>Sec. 911. Budgetary effects.</li>
</ul>
</ul>
</ul>
Andrew Gantman, CPA MBA MBThttp://www.blogger.com/profile/16621218226920063369noreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-1359291138529683142011-09-13T19:06:00.000-06:002011-10-18T15:41:03.604-06:00Obama's proposed "American Jobs Act" just releasedWhile I still need to go through it (199 pages), the <u><i>American Jobs Act</i></u><i> </i>was just released and is available at <a href="http://www.whitehouse.gov/sites/default/files/omb/legislative/reports/american-jobs-act.pdf">http://www.whitehouse.gov/sites/default/files/omb/legislative/reports/american-jobs-act.pdf </a>and includes the following sections:<br />
<ul>
<li>White House Message to Congress on the American Jobs Act of 2011 (starting on page 2 of the .pdf)
</li>
<li>
Table of Contents and Text of the proposal (starting on page 4 of the .pdf)</li>
<li>
Section-by-Section Analysis and Explanation of the American Jobs Act of 2011 (starting on page 159 of the .pdf)</li>
</ul>
I hope to get something out soon on this, so stay tuned!<br />
<br />
<div class="hP">
</div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-18078040910967014522011-01-07T10:12:00.000-07:002011-01-07T12:24:17.633-07:00Enhanced Federal Research Tax Credits? Yes!!A revisit of my October 4 posting <a href="http://tax-fishing-and-other.blogspot.com/2010/10/enhanced-federal-research-tax-credits.html">http://tax-fishing-and-other.blogspot.com/2010/10/enhanced-federal-research-tax-credits.html </a><b style="color: #6aa84f;">in light of the </b><b style="color: #6aa84f;">passage of the</b><span style="color: #6aa84f;"> <a href="http://tax-fishing-and-other.blogspot.com/2010/12/tax-relief-unemployment-insurance.html">Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010</a>.</span><br />
<br />
<b>Enhanced Federal Research Tax Credits? <strike>Hopefully, but not quite yet...</strike> </b><b style="color: #6aa84f;">FINALLY</b><b><span style="color: #6aa84f;">!</span></b><br />
<br />
By now, many have already heard about how President Obama signed the Small Business Jobs Act of 2010 into law on September 27. Rather than go into a detailed discussion of the Act, I'd like to clarify two particular items that seem to be widely misreported <b style="color: #6aa84f;">(at least back in September)</b>.<br />
<br />
In short, the federal research tax credit <b style="color: #6aa84f;"><u>does</u> </b><span style="color: #6aa84f;"></span><strike><u>not</u> </strike>(under <b style="color: #6aa84f;">now-</b>current law<span style="color: #6aa84f;"> <b>as of December</b></span>) qualify for <strike>either of </strike>the following provisions in the new law: <br />
<ul><li><u>Five-year carryback of general business credit of eligible small business</u> - This provision extends the carryback period for eligible small business tax credits from one to five years for eligible small business taxpayers. However, this provision is only effective for credits <b style="color: black;"><i>determined</i></b><span style="color: black;"> (i.e., generated) in the taxpayer's first taxable year beginning after December 31, 2009. And since the federal research tax credit has (under </span> <b style="color: #6aa84f;">now-</b><span style="color: black;">current law as of the time of this <b style="color: #6aa84f;">updated </b>writing) <strike>expired </strike><b style="color: #6aa84f;">been extended</b> for qualified expenditures paid/incurred after December 31, 2009 <b style="color: #6aa84f;">through December 31, 2011</b>, there <u style="color: #6aa84f;"><b>are</b></u><span style="color: #6aa84f;"><b> </b></span><strike>no </strike>federal research tax credits to be </span><b style="color: black;"><i>determined</i></b> during that period.</li>
</ul><ul><li><u style="color: black;">General business credit of eligible small business not subject to alternative minimum tax</u><span style="color: black;"> - This provision effectively allows eligible small business tax credits to offset an eligible small business taxpayer's AMT liability. However (similar to the 5-year carryback provision), this provision is only effective for credits </span><b style="color: black;"><i>determined</i></b> (i.e., generated) in the taxpayer's first taxable year beginning after December 31, 2009. Again, since the federal research tax credit has (under <b style="color: #6aa84f;">now-</b>current law as of the time of this <span style="color: black;"><b style="color: #6aa84f;">updated </b></span>writing) <span style="color: black;"><strike>expired </strike><b style="color: #6aa84f;">been extended</b> </span>for qualified expenditures paid/incurred after December 31, 2009 <span style="color: black;"><b style="color: #6aa84f;">through December 31, 2011</b></span>, there <span style="color: black;"><u style="color: #6aa84f;"><b>are</b></u><span style="color: #6aa84f;"><b> </b></span></span><strike>no </strike>federal research tax credits to be <b style="color: black;"><i>determined</i></b> during that period.</li>
</ul><br />
<b><span style="color: #6aa84f;">In this case, I'm especially glad to say "I told you so" so go out there and claim your credits (and don't forget to write if you have any questions or comments)!</span></b><br />
<br />
<strike>Despite this bad (and hopefully temporary) news, there is still hope that Congress will extend the federal research tax credit retroactively from January 1, 2010, but we'll have to wait and see about that. As for my personal thoughts on the prospects of a retroactive extension, I think there's a good chance of it for the following reasons:</strike><br />
<ul><li><strike>President Obama on September 8 has already identified the federal research tax credit as an important item (see <a href="http://tax-fishing-and-other.blogspot.com/2010/09/white-house-releases-research-tax.html">http://tax-fishing-and-other.blogspot.com/2010/09/white-house-releases-research-tax.html</a>).</strike></li>
<li><strike>The House (albeit back in January 2009) introduced H.R. 422 which would (1) extend the regular federal research tax credit through December 31, 2010, (2) increase the Alternative Simplified Credit ("ASC") method of computing the federal research tax credit to 20%, and (3) make the ASC permanent. So there is (or at least was) clearly some support in the House as it was introduced with 105 co-sponsors.</strike></li>
<li><strike>The Senate (albeit back in June 2009) introduced S. 1203, which effectively mirrors H.R. 422. So there is (or at least was) clearly some support in the Senate as it was introduced with 22 co-sponsors.</strike></li>
</ul><strike><br />
</strike><br />
<strike><br />
</strike><br />
<strike><br />
</strike><br />
<strike><i><u>Note</u>: The Act was passed by Congress as H.R. 5297 and became Public Law No. 111-240 when it was signed into law.</i></strike><br />
<strike><br />
</strike><br />
<strike>Links:</strike><br />
<ul><li><strike><a href="http://www.jct.gov/publications.html?func=startdown&id=3707">Joint Committee on Taxation's writeup (JCX-47-10)</a></strike></li>
<li><strike><a href="http://hdl.loc.gov/loc.uscongress/legislation.111hr5297">H.R. 5297 on Thomas (at the Library of Congress)</a></strike></li>
<li><strike><a href="http://hdl.loc.gov/loc.uscongress/legislation.111hr422">H.R. 422 on Thomas (at the Library of Congress)</a></strike></li>
<li><strike><a href="http://hdl.loc.gov/loc.uscongress/legislation.111s1203">S. 1203 on Thomas (at the Library of Congress)</a></strike></li>
</ul>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-7625968410555364661.post-57813395307212594662010-12-20T12:50:00.000-07:002010-12-20T19:39:04.979-07:00Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010 signed into law<div style="text-align: center;"><b><u>Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010 signed into law</u></b></div><br />
<div></div>As you’ve probably already heard, President Obama signed the Bush-era tax cuts extension into law on Friday (officially known as the “Tax Relief, Unemployment Insurance Reauthorization, And Job Creation Act Of 2010”).<br />
<br />
<div></div>While the text of the new law is only 30 pages, it is nonetheless very broad in its scope and is sure to have a significant impact on virtually all taxpayers.<br />
<br />
<div></div>So without further ado, here is a recap of some of the more generally applicable effects on both individuals and businesses. For a full description of the provisions (as well as the text of the new law), please see the links at the end of this message.<br />
<br />
<div></div><br />
<div></div><div style="text-align: center;"><b><u>Individuals</u></b></div><br />
<div></div>The new law extends, renews or enhances a large number of individual tax incentives, among the most far reaching being reduced individual income tax rates and an across-the board payroll tax cut for 2011. This letter highlights some of the key individual tax incentives in the new law. <br />
<br />
<div></div><b><i>Individual tax rates.</i></b> <br />
Reduced individual tax rates put in place in 2001 were scheduled to expire after 2010. The new law extends the reduced rates for two years. The current rate brackets (10, 15, 25, 28, 33 and 35 percent) remain unchanged for 2011 and 2012. The new law also extends full repeal of the itemized deduction limitation and full repeal of the personal exemption phase-out, both scheduled to expire after 2010, for two years. <br />
<br />
<div></div>The extension of the reduced individual tax rates is significant. If the old rates had returned, the top two rates would have jumped from 33 and 35 percent to 36 and 39.6 percent, respectively. The current 10 percent rate would have disappeared. Additionally, marriage penalty relief in the form of an expanded 15 percent rate bracket would also have expired.<br />
<br />
<div></div><b><i>AMT relief.</i></b> <br />
Along with extending these rate cuts, the new law targets relief to taxpayers facing the alternative minimum tax (“AMT”). Because the AMT is not indexed for inflation, and for other reasons, the tax steadily encroaches on middle income taxpayers. The new law stops this encroachment by giving individuals higher exemption amounts and providing other targeted relief. The reach of the AMT often surprises individuals. While the provisions in the new law are helpful, it is also important to plan strategically for the AMT. Unlike the income tax rates, the higher AMT exemption had already expired at the end of 2009 before the new law stepped in to save it. Its two-year extension, therefore, expires earlier, at the end of 2011.<br />
<br />
<b><i>Payroll tax cut.</i></b> <br />
Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $106,800 (in 2010 and 2011), while self-employed individuals pay 12.4 percent. Effective for calendar year 2011, the new law reduces the employee-share from 6.2 percent to 4.2 percent up to the taxable maximum. The employer-share remains unchanged. Self-employed individuals will pay 10.4 percent on self-employment income up to the taxable maximum. The reduction has no effect on an individual’s future Social Security benefits.<br />
<br />
The payroll tax cut replaces the Making Work Pay credit, which temporarily reduced income tax withholding in 2009 and 2010. The Making Work Pay credit phased-out for higher-income individuals. The payroll tax cut is across-the-board (up to the taxable maximum of $106,800). <br />
<br />
Shortly after the new law was passed, the IRS instructed employers to start reducing the amount of Social Security tax withheld as soon as possible in 2011 but no later than January 31, 2011. For any Social Security tax over-withheld in January, employers should make an offsetting adjustment in an individual’s pay no later than March 31, 2011.<br />
<br />
The payroll tax cut opens up some tax planning opportunities for individuals. The savings could be contributed to an IRA or another retirement savings vehicle, thereby compounding available tax benefits. The savings also could be used to help fund a Coverdell education savings account. <br />
<br />
<div><b><i>Capital gains/dividends.</i></b> </div>In 2003, Congress set new maximum tax rates for qualified capital gains and dividends but, like the individual rate cuts, these taxpayer-friendly rates were temporary. For 2010, the maximum tax rate is 15 percent (zero percent for individuals in the 10 and 15 percent tax brackets). The new law extends these rates for two years, through December 31, 2012. In a related development, the new law extends the temporary 100 percent exclusion of gain on certain small business stock.<br />
<br />
<b><i>Child tax credit.</i></b> <br />
Many individuals enjoy the benefit of the $1,000 per child tax credit. Without the new law, the child tax credit would have dropped to $500 for 2011. The new law extends the $1,000 credit and keeps the refundability threshold at $3,000 for 2011 and 2012. In related developments, the new law also extends some enhancements to the earned income tax credit and the adoption credit for two years. <br />
<br />
<b><i>Estate tax.</i></b> <br />
Under the new law, the federal estate tax will again apply to the estates of decedents dying after December 31, 2009 and before January 1, 2013. The new law sets a maximum estate tax rate of 35 percent with a $5 million exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply. This election, and many of the other estate tax provisions in the new law, is very technical. Besides the estate tax, there are provisions in the new law extending and modifying the federal gift tax and the federal generation skipping transfer (“GST”) tax. <br />
<br />
<b><i>Education.</i></b> <br />
A variety of tax incentives are available to help save for and finance education costs. Like so many incentives, they are temporary. The new law extends some of the most popular education tax incentives. They include:<br />
<ul><li>American Opportunity Tax Credit</li>
<li>Higher education tuition deduction</li>
<li>Student loan interest deduction</li>
<li>Exclusion for employer-provided educational assistance</li>
<li>Enhancements to Coverdell education savings accounts</li>
<li>Special rules for certain scholarships</li>
</ul><div>The education incentives in the tax code are among the most complex. Often, taxpayers will mistakenly believe they cannot claim more than one or they may inadvertently claim ones they should not. </div><br />
<div><b><i>Energy.</i></b> </div>Individuals who made some energy-efficient improvements in 2009 or 2010 may have benefitted from a special tax break. This tax incentive rewarded individuals who installed energy-efficient windows, doors, furnaces, and other items in their homes. The credit, while very valuable, was also very complex. The new law extends the credit but also adds to the complexity by reinstating rules for the credit in place before 2009. The complexity is certain to confuse taxpayers. Please consider the possible benefits if you are planning to install new windows, doors, heating or cooling systems, or other energy-efficient items so you do not miss out on this tax break.<br />
<br />
<b><i>More incentives.</i></b> <br />
The new law extends many valuable but temporary tax incentives for individuals. They include the state and local sales tax deduction, the teacher’s classroom expense deduction, and special rules for individuals who contribute IRA proceeds to charity. Keep in mind that not all of the expired temporary individual tax incentives were extended. Among the incentives not extended are the additional standard deduction for real property taxes, the $2,400 exclusion for unemployment benefits, the first-time homebuyer tax credit, COBRA premium assistance, and some others.<br />
<br />
<br />
<div></div><div style="text-align: center;"><b><u>Businesses</u></b> </div><br />
<div></div>The multi-billion dollar new law extends, renews or enhances a large number of business tax incentives. This letter highlights some of the key business tax incentives in the new law.<br />
<br />
<div></div><b><i>Business spending.</i></b> <br />
During past economic slowdowns, Congress has used bonus depreciation and enhanced Code Sec. 179 small business expensing to help jumpstart business spending. The new law provides for 100 bonus depreciation. The 100 percent bonus depreciation rate applies to qualified property acquired after September 8, 2010 and before January 1, 2012 and placed in service before January 1, 2012 (or before January 1, 2013 for certain longer-lived and transportation property). Additionally, 50 percent bonus depreciation is available for qualified property placed in service in 2012. Moreover, certain corporations may be able to elect to accelerate any alternative minimum tax (“AMT”) credit in lieu of bonus depreciation.<br />
<br />
Along with bonus depreciation, the new law extends enhanced Code Sec. 179 expensing for 2012 but not at the 2010 and 2011 dollar and investment limits. For 2010 and 2011, the Code Sec. 179 dollar limit is $500,000 and the investment limit is $2 million. The new law makes no changes to these limits for 2010 and 2011. However, the dollar limit will fall to $125,000 (indexed for inflation) and the investment limit will fall to $500,000 (indexed for inflation) for tax years beginning in 2012 (and sunsetting after December 31, 2012). The 2012 amounts, while reduced from 2010 and 2011, are still above the amounts that would have been in place for 2012 absent the new law ($25,000/$200,000 respectively).<br />
<br />
For 2010 and 2011, special rules apply to qualified real property. Taxpayers can elect up to $250,000 of the $500,000 dollar limit for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. The new law does not extend these special rules beyond 2011. The new law does renew a 15-year recovery period for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property for 2010 and 2011.<br />
<br />
<b><i>Payroll tax cut.</i></b> <br />
The new law reduces an employee’s share of Social Security taxes (the OASDI portion) from 6.2 percent to 4.2 percent up to the taxable maximum amount of $106,800 for calendar year 2011. The new law does not reduce the employer’s share, which remains at 6.2 percent for 2011. Self-employed individuals, including independent contractors with which a business may contract, are also entitled to a 2 percentage point reduction in payroll taxes, from 12.4 percent to 10.4 percent.<br />
<br />
The IRS has instructed employers to start using new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but no later than January 31, 2011. The IRS also instructed employers to make any offsetting adjustments in an employee’s pay for Social Security over-withheld during January as soon as possible but no later than March 31, 2011.<br />
<br />
The new law does not extend payroll tax forgiveness for qualified new hires. This incentive was part of the Hiring Incentives to Restore Employment (“HIRE”) Act of 2010 and will expire, as scheduled, after 2010. Under the HIRE Act, qualified employers do not have to pay their share of OASDI for a covered employee’s employment from the day after March 18, 2010 through December 31, 2010. The HIRE Act also provides for a worker retention credit, which qualified employers may be able to claim if the covered employee works a certain number of weeks and meets other requirements. <br />
<br />
<b><i>Tax brackets.</i></b> <br />
Businesses owners, such as sole proprietors, who are taxed at the individual tax rates will benefit from an extension of reduced individual tax rates. The new law extends for two years (2011 and 2012) the current individual tax rates of 10, 15, 25, 28, 33, and 35 percent). Absent the new law, all of the rates would have risen with the top two rates increasing from 33 and 35 percent to 36 and 39.6 percent respectively.<br />
<br />
<div></div><b><i>Estate tax.</i></b> <br />
Under the new law, the federal estate tax will again apply to the estates of decedents dying after December 31, 2009 and before January 1, 2013. The new law sets a maximum estate tax rate of 35 percent with a $5 million exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply.<br />
<br />
<b><i>Research tax credit.</i></b> <br />
In recent years, Congress has come close to making the Code Sec. 41 research tax credit permanent but the cost of a permanent credit has been prohibitive. The new law renews the credit, which expired at the end of 2009, for 2010 and 2011.<br />
<br />
<b><i>Work Opportunity Tax Credit.</i></b> <br />
The Work Opportunity Tax Credit (“WOTC”) rewards employers that hire economically-disadvantaged individuals and individuals from groups with historically high rates of unemployment. The WOTC was scheduled to expire after August 31, 2011. The new law extends the WOTC through the end of 2011. However, the new law does not extend two groups that were added to the credit in 2009 (unemployed veterans and disconnected youth).<br />
<br />
<b><i>Energy.</i></b> <br />
Recent laws have used the Tax Code to encourage the development and production of alternative fuels, such as energy from wind and biomass. Many of these incentives are temporary. The new law extends, renews or enhances some of the incentives, including:<br />
<ul><li>Grants for certain alternative energy property in lieu of tax credits</li>
<li>Tax credits for biodiesel and renewable diesel fuel</li>
<li>Tax credit for refined coal facilities</li>
<li>Percentage depletion for oil and gas from marginal wells</li>
<li>Special tax incentives for builders of energy-efficient homes</li>
<li>And more </li>
</ul><br />
<div><b><i>Business tax extenders.</i></b> </div>A package of business tax incentives, known as extenders because they regularly expire and are regularly extended, is renewed by the new law. They include:<br />
<ul><li>Differential wage credit</li>
<li>New Markets Tax Credit (with modifications)</li>
<li>Brownfields remediation</li>
<li>Tax treatment of certain dividends of RICs and certain investments of RICs</li>
<li>Active financing exception/look-through treatment for CFCs</li>
<li>Tax incentives for empowerment zones and the District of Columbia</li>
<li>Indian employment credit</li>
<li>Railroad track maintenance credit</li>
<li>Mine rescue training credit</li>
<li>Code Sec. 199 deduction for Puerto Rico</li>
<li>Five-year write-off of farm machinery</li>
<li>Accelerated depreciation for business property on an Indian reservation</li>
<li>And more</li>
</ul><br />
<div><b><i>What’s not included.</i></b> </div>Despite significant support in Congress, the new law does not repeal a controversial expansion of information reporting. The Patient Protection and Affordable Care Act of 2010 requires businesses to report payments for property and payments to corporations aggregating $600 or more in a calendar year made after December 31, 2011. Congress may revisit this requirement before the effective date. The new law also does not lower the corporate tax rate, another proposal that could be addressed in the future.<br />
<br />
<div></div><br />
<div></div><u><b>Further reading</b></u><br />
<ul><li>CCH – <a href="http://tax.cchgroup.com/downloads/files/pdfs/legislation/bush-taxcuts.pdf">http://tax.cchgroup.com/downloads/files/pdfs/legislation/bush-taxcuts.pdf</a></li>
<li>Joint Committee on Taxation – <a href="http://www.jct.gov/publications.html?func=startdown&id=3716">http://www.jct.gov/publications.html?func=startdown&id=3716</a></li>
<li>Full text (U.S. Govt. Printing Ofc.) – <a href="http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf">http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf</a></li>
<li>Library of Congress (detailed info) – <a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:h.r.04853">http://thomas.loc.gov/cgi-bin/bdquery/z?d111:h.r.04853</a>:</li>
</ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-74829050652126516802010-12-16T23:06:00.000-07:002010-12-16T23:06:14.343-07:00House passes Bush tax cut extension bill, now awaits President's signatureBy a vote of 277-148, the House this evening passed H.R. 4853, leaving the President's signature as the final step to bring this landmark legislation into law.<br />
<br />
Will he sign it Friday? We shall see!<br />
<br />
Here are the vote results: <a href="http://clerk.house.gov/evs/2010/roll647.xml">http://clerk.house.gov/evs/2010/roll647.xml</a>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-15027918984838807492010-12-14T20:16:00.000-07:002010-12-14T20:18:08.680-07:00Senate to pass its version of the Bush tax cuts extensionOn Wednesday, December 15 the Senate is widely expected to pass its version of the Bush tax cuts extension in the form of <a href="http://finance.senate.gov/legislation/download/?id=890f618a-8247-4010-accd-912b57ddb560">Senate Amendment 4753</a> ("The Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010"). S.A. 4753 is the Senate's version of <a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:H.R.4853:">H.R. 4853</a> ("Middle Class Tax Relief Act of 2010"). <br />
<br />
After its passage, the bill heads to the House, where it does face Democratic opposition but is nevertheless expected to pass. After House passage, it moves to the President for signature. I suspect that we might see it signed into law this week (or early next week).<br />
<br />
In the interim, here's the Senate Finance Committee's summary of its bill:<br />
<br />
<blockquote><div style="text-align: center;"><u><b>Summary of the Reid Tax Relief, Unemployment Insurance Reauthorization</b></u></div><div style="text-align: center;"><u><b>and Job Creation Act of 2010</b></u> </div><div style="text-align: center;">(source: <a href="http://finance.senate.gov/legislation/download/?id=5598822b-8892-4445-b43a-4da7f0b991a0">http://finance.senate.gov/legislation/download/?id=5598822b-8892-4445-b43a-4da7f0b991a0</a>)</div><br />
<b>I. Temporary Extension of Tax Relief</b><br />
<br />
Two major bills enacting tax cuts for individuals expire at the end of 2010: the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA); and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). The following package extends these provisions from EGTRRA and JGTRRA for an additional two years, through 2012, and will provide important tax relief to American taxpayers. The following package also extends a number of provisions enacted as part of EGTRRA that were modified in the American Recovery and Reinvestment Act.<br />
<br />
<b><u>Reductions in Individual Income Tax Rates</u></b><br />
<br />
<b>Temporarily extend the 10% bracket</b>. Under current law, the 10% individual income tax bracket expires at the end of 2010. Upon expiration, the lowest tax rate will be 15%. This proposal extends the 10% individual income tax bracket for an additional two years, through 2012. <br />
<br />
<b>Temporarily extend the 25%, 28%, 33%, and 35% brackets</b>. Under current law, the 25%, 28%, 33%, and 35% individual income tax brackets expire at the end of 2010. Upon expiration, the rates become 28%, 31%, 36%, and 39.6% respectively. This proposal extends the 25%, 28%, 33%, and 35% individual income tax brackets for an additional two years, through 2012. <br />
<br />
<b>Temporarily repeal the Personal Exemption Phase-out</b>. Personal exemptions allow a certain amount per person to be exempt from tax. Due to the Personal Exemption Phase-out (“PEP”), the exemptions are phased out for taxpayers with AGI above a certain level. The EGTRRA repealed PEP for 2010. The proposal extends the repeal of PEP for an additional two years, through 2012. <br />
<br />
<b>Temporarily repeal the itemized deduction limitation</b>. Generally, taxpayers itemize deductions if the total deductions are more than the standard deduction amount. Since 1991, the amount of itemized deductions that a taxpayer may claim has been reduced, to the extent the taxpayer’s AGI is above a certain amount. This limitation is generally known as the “Pease limitation.” The EGTRRA repealed the Pease limitation on itemized deductions for 2010. The proposal extends the repeal of the Pease limitation for an additional two years, though 2012. <br />
<br />
<u><b>Capital Gains and Dividends</b></u><br />
<br />
<b>Temporarily extend the capital gains and dividend rates</b>. Under current law, the capital gains and dividend rates for taxpayers below the 25% bracket is equal to zero percent. For those in the 25% bracket and above, the capital gains and dividend rates are currently 15%. These rates expire at the end of 2010. Upon expiration, the rates for capital gains become 10% and 20%, respectively, and dividends are subject to the ordinary income rates. This proposal extends the current capital gains and dividends rates for all taxpayers for an additional two years, through 2012. <br />
<br />
<u><b>Child Tax Credit</b></u><br />
<br />
<b>Temporarily extend the modified child tax credit</b>. Generally, taxpayers with income below certain threshold amounts may claim the child tax credit to reduce federal income tax for each qualifying child under the age of 17. The EGTRRA increased the credit from $500 to $1,000. The EGTRRA also expanded refundability. The amount that may be claimed as a refund was 15% of earnings above $10,000. The American Recovery and Reinvestment Act of 2009 provided that earnings above $3,000 would count towards refundability for 2009 and 2010. This proposal extends the current child tax credit for an additional two years, through 2012.<br />
<br />
<u><b>Marriage Penalty Relief</b></u><br />
<br />
<b>Temporarily extend marriage penalty relief</b>. The proposal extends the marriage penalty relief for the standard deduction, the 15 percent bracket, and the EITC for an additional two years, through 2012. <br />
<br />
<u><b>Incentives for Families and Children</b></u><br />
<br />
<b>Temporarily extend the expanded dependent care credit</b>. The dependent care credit allows a taxpayer a credit for an applicable percentage of child care expenses for children under 13 and disabled dependents. The EGTRRA increased the amount of eligible expenses from $2,400 for one child and $4,800 for two or more children to $3,000 and $6,000, respectively. The EGTRRA also increased the applicable percentage from 30 percent to 35 percent. The proposal extends the changes to the dependent care credit made by EGTRRA for an additional two years, through 2012. <br />
<br />
<b>Temporarily extend the increased adoption tax credit and the adoption assistance programs exclusion</b>. Taxpayers that adopt children can receive a tax credit for qualified adoption expenses. A taxpayer may also exclude from income adoption expenses paid by an employer. The EGTRRA increased the credit from $5,000 ($6,000 for a special needs child) to $10,000, and provided a $10,000 income exclusion for employer-assistance programs. The Patient Protection and Affordable Care Act of 2010 extended these benefits to 2011 and made the credit refundable. The proposal extends for an additional year, through 2012, the increased adoption credit amount and the exclusion for employer-assistance programs as enacted in EGTRRA.<br />
<br />
<b>Temporarily extend the credit for employer expenses for child care assistance</b>. The EGTRRA provided employers with a credit of up to $150,000 for acquiring, constructing, rehabilitating or expanding property which is used for a child care facility. The proposal extends this provision for an additional two years, through 2012. <br />
<br />
<u><b>Earned Income Tax Credit (EITC).</b></u><br />
<br />
<b>Temporarily extend third-child EITC</b>. Under current law, working families with two or more children currently qualify for an earned income tax credit equal to 40% of the family’s first $12,570 of earned income. The American Recovery and Reinvestment Act increased the earned income tax credit to 45% of the family’s first $12,570 of earned income for families with three or more children and increased the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children). This proposal extends for an additional two years, through 2012, the American Recovery and Reinvestment Act provisions that increased the credit for families with three or more children and increased the phase-out range for all married couples filing a joint return. <br />
<br />
<u><b>Education Incentives</b></u><br />
<br />
<b>Temporarily extend expanded Coverdell Accounts</b>. Coverdell Education Savings Accounts are tax-exempt savings accounts used to pay the higher education expenses of a designated beneficiary. The EGTRRA increased the annual contribution amount from $500 to $2,000 and expanded the definition of education expenses to include elementary and secondary school expenses. The proposal extends the changes to Coverdell accounts for an additional two years, through 2012. <br />
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<b>Temporarily extend the expanded exclusion for employer-provided educational assistance</b>. An employee may exclude from gross income up to $5,250 for income and employment tax purposes per year of employer-provided education assistance. Prior to 2001, this incentive was temporary and only applied to undergraduate courses. The EGTRRA expanded this provision to graduate education and extended the provision for undergraduate and graduate education to the end of 2010. The proposal extends the changes to this provision for an additional two years, through 2012. <br />
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<b>Temporarily extend the expanded student loan interest deduction</b>. Certain individuals who have paid interest on qualified education loans may claim an above-the-line deduction for such interest expenses up to $2,500. Prior to 2001, this benefit was only allowed for 60 months and phased-out for taxpayers with income between $40,000 and $55,000 ($60,000 and $75,000 for joint filers). The EGTRRA eliminated the 60 month rule and increased the income phase-out to $55,000 to $70,000 ($110,000 and $140,000 for joint filers). The proposal extends the changes to this provision for an additional two years, through 2012. <br />
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<b>Temporarily extend the exclusion from income of amounts received under certain scholarship programs</b>. Scholarships for qualified tuition and related expenses are excludible from income. Qualified tuition reductions for certain education provided to employees are also excluded. Generally, this exclusion does not apply to qualified scholarships or tuition reductions that represent payment for teaching, research, or other services. The National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program provide education awards to participants on the condition that the participants perform certain services. The EGTRRA allowed the scholarship exclusion to apply to these programs. The proposal extends the changes to this provision for an additional two years, through 2012. <br />
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<b>Arbitrage rebate exception for school construction bonds</b>. Under current law, issuers of tax-exempt bonds must rebate to the U.S. Treasury arbitrage (excess interest income) earned from the investment of tax-exempt bond proceeds in higher-yielding taxable securities. The calculation of excess interest income can be complex, and as a result, many governments incur large costs to comply with the requirements. To ease the burden on small issuers, the federal tax code exempts governments that issue a relatively small number of tax-exempt bonds in a given year from the requirement. In general, the small issuer rebate exception can only be used by state and local governments that issue less than $5 million in governmental and 501(c)(3) bonds annually. This exception is $10 million for bonds issued for qualified educational facilities. The EGTRRA increased the small-issuer arbitrage rebate exception for school construction from $10 million to $15 million. This proposal extends the $15 million arbitrage rebate exception for school construction for an additional two years, through 2012. <br />
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<b>Tax-exempt private activity bonds for qualified education facilities</b>. Under current law, proceeds from private activity bonds issued by a state or local government qualify as tax-exempt if 95% or more of the net bond proceeds are used for a qualified purpose as defined by the Internal Revenue Code. The EGTRRA expanded the definition of a private activity for which tax-exempt bonds may be issued to include bonds for qualified public educational facilities. Bonds issued for qualified educational facilities are not counted against a state’s private-activity volume cap. Instead, these bonds have their own volume capacity limit equal to the lesser of $10 per resident or $5 million. This proposal extends the allowance to issue tax-exempt private activity bonds for public school facilities for an additional two years, through 2012. <br />
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<b>Temporarily extend the American Opportunity Tax Credit</b>. Created under the American Recovery and Reinvestment Act, the American Opportunity Tax Credit is available for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this tax credit, taxpayers receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including course materials) paid during the taxable year and 25% of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent of the credit is refundable. This tax credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). This proposal extends the American Opportunity Tax Credit for an additional two years, through 2012. <br />
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<u><b>Other EGTRRA Provisions</b></u><br />
<br />
<b>Temporarily extend tax relief for Alaska settlement funds</b>. The EGTRRA allowed an election in which Alaska Native settlement trusts can elect to pay tax at the same rate as the lowest individual marginal rate, rather than the higher rates that generally apply to trusts. Beneficiaries of the trust do not pay tax on the distributions of an electing trust’s taxable income. Finally, contributions by an Alaska Native corporation to an electing trust will not be deemed distributions to the corporation’s shareholders. This proposal makes extends the elective tax treatment for Alaska Native settlement trusts for an additional two years, through 2012. <br />
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<b>II. Temporary Individual Alternative Minimum Tax (AMT) Relief</b><br />
<br />
<b>Two-year AMT patch</b>. Currently, a taxpayer receives an exemption of $33,750 (individuals) and $45,000 (married filing jointly) under the AMT. Current law also does not allow nonrefundable personal credits against the AMT. The proposal increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly). The proposal also allows the nonrefundable personal credits against the AMT. The proposal is effective for taxable years beginning after December 31, 2009. <br />
<br />
<b>III. Temporary Estate Tax Relief</b><br />
<br />
<b>Temporary estate, gift and generation skipping transfer tax relief</b>. The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year. <br />
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<b>Portability of unused exemption</b>. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.<br />
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<b>Reunification</b>. Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.<br />
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<b>IV. Temporary Extension of Investment Incentives</b><br />
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<b>Extension of bonus depreciation</b>. Under current law, businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Congress allowed businesses, beginning January 1, 2008 through December 31, 2009, to take an additional depreciation deduction allowance equal to 50 percent of the cost of the depreciable property placed in service in those years. Under the Small Business Jobs Act of 2010, this temporary increase in the depreciation deduction allowance was extended through December 31, 2010. The bill extends and temporarily increases this bonus depreciation provision for investments in new business equipment. For investments placed in service after September 8, 2010 and through December 31, 2011, the bill provides for 100 percent bonus depreciation. For investments placed in service after December 31, 2011 and through December 31, 2012, the bill provides for 50 percent bonus depreciation. The provision also allows taxpayers to elect to accelerate some AMT credits in lieu of bonus depreciation for taxable years 2011 and 2012.<br />
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<b>Temporarily extend increase in the maximum amount and phase-out threshold under section 179</b>. Under current law, a taxpayer with a sufficiently small amount of annual investment may elect to deduct the cost of certain property placed in service for the year rather than depreciate those costs over time. The 2003 tax cuts temporarily increased the maximum dollar amount that may be deducted from $25,000 to $100,000. The tax cuts also increased the phase-out amount from $200,000 to $400,000. In 2007, tax cuts temporarily increased these thresholds to $125,000 and $500,000 respectively, indexed for inflation. These amounts have been further increased and extended several times on a temporary basis, including most recently as part of the Small Business Jobs Act which increased the thresholds to $500,000 and $2,000,000 for the taxable years beginning in 2010 and 2011. This proposal extends the 2007 maximum amount and phase-out thresholds for taxable years beginning in 2012, at $125,000 and $500,000 respectively, indexed for inflation. The proposal is effective for taxable years beginning after December 31, 2011. <br />
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<b>V. Temporary Extension of Unemployment Insurance</b><br />
<br />
<b>Extension of unemployment insurance</b>. The unemployment insurance proposal provides a one-year reauthorization of federal UI benefits. The proposal continues the Emergency Unemployment Compensation (EUC) benefits for one year. In addition, it continues 100% Federal Financing of Extended Benefits (EB) for one year, and makes changes to the EB look-back enabling states to continue to trigger on EB.<br />
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<b>VI. Temporary Employee Payroll Tax Cut</b><br />
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<b>Temporary reduction in employee-paid payroll taxes</b>. Under current law employees pay a 6.2 percent Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay a 12.4 percent Social Security self-employment taxes of on all their self-employment income up to the same threshold. The bill provides a payroll/self-employment tax holiday during 2011 of two percentage points. This means employees will pay only 4.2 percent on wages and self-employment individuals will pay only 10.4 percent on self-employment income up to the threshold. <br />
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<b>VII. Temporary Extension of Certain Expiring Provisions</b><br />
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<u><b>Energy</b></u><br />
<br />
<b>Biodiesel and renewable diesel</b>. The bill extends through 2011 the $1.00 per gallon production tax credit for biodiesel, as well as the small agri-biodiesel producer credit of 10 cents per gallon. The bill also extends through 2011 the $1.00 per gallon production tax credit for diesel fuel created from biomass.<br />
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<b>Refined Coal</b>. The bill extends through 2011 the placed-in-service deadline for qualifying refined coal facilities.<br />
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<b>Energy-efficient new homes credit</b>. The bill extends through 2011 the credit for manufacturers of energy-efficient residential homes.<br />
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<b>Alternative fuels credit</b>. The bill extends through 2011 the $0.50 per gallon alternative fuel tax credit. The bill does not extend this credit any liquid fuel derived from a pulp or paper manufacturing process (i.e., black liquor). <br />
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<b>Special rule for sales of electric transmission property</b>. The bill extends through 2011 the present law deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies.<br />
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<b>Special rule for marginal wells</b>. The bill extends through 2011 the suspension on the taxable income limit for purposes of depleting a marginal oil or gas well. <br />
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<b>Section 1603</b>. The bill extends for one year the start-of-construction deadline for the cash grant in lieu of tax credit program, established in Section 1603 of the American Recovery and Reinvestment Act. <br />
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<b>Ethanol</b>. The bill extends through 2011 the per-gallon tax credits and outlay payments for ethanol. The bill also extends through 2011 the existing 14.27 cents per liter (54 cents per gallon) tariff on imported ethanol and the related 5.99 cents per liter (22.67 cents per gallon) tariff on ethyl tertiary-butyl ether (ETBE).<br />
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<b>Energy-efficient appliances</b>. The bill extends through 2011 and modifies standards for the Section 45M credit for US-based manufacture of energy-efficient clothes washers, dishwashers and refrigerators. <br />
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<b>Energy-efficient existing homes</b>. The bill extends through 2011 the credit under Section 25C of the Code for energy-efficient improvements to existing homes, reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act. Standards for property eligible under 25C are updated to reflect improvements in energy efficiency. <br />
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<b>Alternative vehicle refueling property</b>. The bill extends through 2011 the 30% investment tax credit for alternative vehicle refueling property. <br />
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<u><b>Individual Tax Relief</b></u><br />
<br />
<b>Above-the-line deduction for certain expenses of elementary and secondary school teachers</b>. The bill extends for two years (through 2011) the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.<br />
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<b>Deduction of State and local general sales taxes</b>. The bill extends for two years (through 2011) the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes.<br />
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<b>Extension of provision encouraging contributions of capital gain real property for conservation purposes</b>. The bill extends for two years (through 2011) the increased contribution limits and carryforward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes.<br />
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<b>Above-the-line deduction for qualified tuition and related expenses</b>. The bill extends for two years (through 2011) the above-the-line tax deduction for qualified education expenses.<br />
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<b>Extension of tax-free distributions from individual retirement plans for charitable purposes</b>. The bill extends for two years (through 2011) the provision that permits tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per taxable year. The bill allows individuals to make charitable transfers during January of 2011 and treat them as if made during 2010.<br />
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<b>Estate tax look-through of certain Regulated Investment Company (RIC) stock held by nonresidents</b>. Although stock issued by a domestic corporation generally is treated as property within the United States, stock of a RIC that was owned by a nonresident non-citizen is not deemed property within the United States in the proportion that, at the end of the quarter of the RIC’s taxable year immediately before a decedent’s date of death, the assets held by the RIC are debt obligations, deposits, or other property that would be treated as situated outside the United States if held directly by the estate (the “estate tax look-through rule for RIC stock”). The proposal permits the look-through rule for RIC stock to apply to estates of decedents dying before January 1, 2012.<br />
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<b>Parity for mass transit benefits</b>. The bill extends through 2011 the increase in the monthly exclusion for employer-provided transit and vanpool benefits to that of the exclusion for employer-provided parking benefits. <br />
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<b>Refund and tax credit disregard for means tested programs</b>. Current law ensures that the refundable components of the EITC and the Child Tax Credit do not make households ineligible for means-tested benefit programs and includes provisions stating that these tax credits do not count as income in determining eligibility (and benefit levels) in means-tested benefit programs, and also do not count as assets for specified periods of time. Without them, the receipt of a tax credit would put a substantial number of families over the income limits for these programs in the month that the tax refund is received. The proposal disregards all refundable tax credits and refunds as income for means tested programs. The proposal is effective for amounts received after December 31, 2009 and does not apply to amounts received after December 31, 2012.<br />
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<u><b>Business Tax Relief</b></u><br />
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<b>R&D credit</b>. The bill reinstates for two years (through 2011) the research credit. <br />
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<b>Indian employment credit</b>. The bill extends for two years (through 2011) the business tax credit for employers of qualified employees that work and live on or near an Indian reservation. The amount of the credit is 20 percent of the excess of wages and health insurance costs paid to qualified employees (up to $20,000 per employee) in the current year over the amount paid in 1993. <br />
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<b>New Markets Tax Credit</b>. Through the New Markets Tax Credit (NMTC) program, the federal government is able to leverage federal tax credits to encourage significant private investment in businesses in low-income communities. For each dollar of qualified private investment, the NMTC program provides investors with either five cents or six cents of federal tax credits (depending on the amount of time that has passed since the original investment was made). The bill extends for two years (through 2011) the new markets tax credit, permitting a maximum annual amount of qualified equity investments of $3.5 billion each year. This is effective for calendar years beginning after December 31, 2009. <br />
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<b>Extension of railroad track maintenance credit</b>. The bill extends for two years (through 2011) the railroad track maintenance credit. <br />
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<b>Mine rescue team training credit</b>. The bill extends for two years (through 2011) the credit for training mine rescue team members.<br />
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<b>Employer wage credit for activated military reservists</b>. The bill extends for two years (through 2011) the provision that provides eligible small business employers with a credit against the taxpayer’s income tax liability for a taxable year in an amount equal to 20 percent of the sum of differential wage payments to activated military reservists.<br />
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<b>Tax benefits for certain real estate developments</b>. The bill extends for two years (through 2011) the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements.<br />
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<b>Extension of seven year straight line cost recovery period for motorsports entertainment complexes</b>. The bill extends for two years (through 2011) the special seven year cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes.<br />
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<b>Accelerated depreciation for business property on an Indian reservation</b>. The bill extends for two years (through 2011) the placed-in-service date for the special depreciation recovery period for qualified Indian reservation property. In general, qualified Indian reservation property is property used predominantly in the active conduct of a trade or business within an Indian reservation, which is not used outside the reservation on a regular basis and was not acquired from a related person.<br />
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<b>Extension of enhanced charitable deduction for contributions of food inventory</b>. The bill extends for two years (through 2011) the provision allowing businesses to claim an enhanced deduction for the contribution of food inventory. <br />
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<b>Extension of enhanced charitable deduction for contributions of book inventories to public schools</b>. The bill extends for two years (through 2011) the provision allowing C corporations to claim an enhanced deduction for contributions of book inventory to public schools (kindergarten through grade 12). <br />
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<b>Extension of enhanced charitable deduction for corporate contributions of computer equipment for educational purposes</b>. The bill extends for two years (through 2011) the provision that encourages businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools by allowing an enhanced deduction for such contributions. <br />
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<b>Election to expense advanced mine safety equipment</b>. The bill extends for two years (through 2010) the provision that provides businesses with 50 percent bonus depreciation for certain qualified underground mine safety equipment. <br />
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<b>Extension of special expensing rules for U.S. film and television productions</b>. The bill extends for two years (through 2011) the provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States ($20 million if the costs are incurred in economically depressed areas in the United States). <br />
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<b>Extension of expensing of environmental remediation costs</b>. The bill extends for two years (through 2011) the provision that allows for the expensing of costs associated with cleaning up hazardous sites. <br />
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<b>Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico</b>. The bill extends for two years (through 2011) the provision extending the section 199 domestic production activities deduction to activities in Puerto Rico.<br />
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<b>Extension of special tax treatment of certain payments to controlling exempt organizations</b>. The bill extends for two years (through 2011) the special rules for interest, rents, royalties and annuities received by a tax exempt entity from a controlled entity. <br />
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<b>Treatment of certain dividends of Regulated Investment Companies (RICs)</b>. The bill extends a provision allowing a RIC, under certain circumstances, to designate all or a portion of a dividend as an “interest-related dividend,” by written notice mailed to its shareholders not later than 60 days after the close of its taxable year. In addition, an interest-related dividend received by a foreign person generally is exempt from U.S. gross-basis tax under sections 871(a), 881, 1441 and 1442 of the Code. The proposal extends the treatment of interest-related dividends and short-term capital gain dividends received by a RIC to taxable years of the RIC beginning before January 1, 2012. <br />
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<b>Treatment of RIC investments as “Qualified Investment Entities” under FIRPTA</b>. The bill extends the inclusion of a RIC within the definition of a “qualified investment entity” under section 897 of the Tax Code through December 31, 2011.<br />
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<b>Active financing exception</b>. The bill extends for two years (through 2011) the active financing exception from Subpart F of the tax code. <br />
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<b>Look-through treatment of payments between related controlled foreign corporations</b>. The bill extends for two years (through 2011) the current law look-through treatment of payments between related controlled foreign corporations.<br />
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<b>Extension of special rule for S corporations making charitable contributions of property</b>. The bill extends for two years (through 2011) the provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder’s adjusted basis in the S corporation.<br />
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<b>Empowerment Zones</b>. The bill extends for two years (through 2011) the designation of certain economically depressed census tracts as Empowerment Zones. Businesses and individual residents within Empowerment Zones are eligible for special tax incentives.<br />
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<b>District of Columbia Enterprise Zone.</b> The bill extends for two years (through 2011) the designation of certain economically depressed census tracts within the District of Columbia as the District of Columbia Enterprise Zone. Businesses and individual residents within this enterprise zone are eligible for special tax incentives. The bill also extends for two years (through 2011) the $5,000 first-time homebuyer credit for the District of Columbia.<br />
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<b>Extension of temporary increase in limit on cover over of rum excise tax revenues to Puerto Rico and the Virgin Islands</b>. The bill extends for two years (through 2011) the provision providing for payment of $13.25 per gallon to cover over a $13.50 per proof gallon excise tax on distilled spirits produced in or imported into the United States. <br />
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<b>Extension of American Samoa economic development credit</b>. The bill extends through 2011 the American Samoa economic development credit.<br />
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<b>Work opportunity tax credit (WOTC)</b>. Under current law, businesses are allowed to claim a work opportunity tax credit equal to 40 percent of the first $6,000 of wages paid to new hires of one of nine targeted groups. These groups include members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program, qualified veterans, designated community residents, and others. The WOTC program is currently set to expire August 31, 2011. The bill extends this provision through December 31, 2011 and would be effective for employees hired after date of enactment. <br />
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<b>Extension and increase in authorization for qualified zone academy bonds (QZABs)</b>. QZABs are a form of tax credit bond which offer the holder a Federal tax credit instead of interest. QZABs can be used to finance renovations, equipment purchases, developing course material, and training teachers and personnel at a qualified zone academy. In general, a qualified zone academy is any public school (or academic program within a public school) below college level that is located in an empowerment zone or enterprise community and is designed to cooperate with businesses to enhance the academic curriculum and increase graduation and employment rates. The provision extends the QZAB program providing an additional $400 million for 2011. It also repeals the direct subsidy feature created as part of the American Recovery and Reinvestment Act for 2011 and for any carryforward of unused allocation. <br />
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<b>Premiums for mortgage insurance deductible as interest that is qualified residence interest</b>. Under current law, a taxpayer may itemize the cost of mortgage insurance on a qualified personal residence. The deduction is phased-out ratably by 10% for each $1,000 by which the taxpayer’s AGI exceeds $100,000. Thus, the deduction is unavailable for a taxpayer with an AGI in excess of $110,000. The bill extends this provision for an additional year, through 2011. <br />
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<b>Exclusion of small business capital gains</b>. Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion is increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. Qualifying small business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation. The provision extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2012 and held for more than five years. <br />
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<u><b>Disaster Relief Provisions</b></u><br />
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<b>Extension of tax incentives for the New York Liberty Zone</b>. The bill extends for two years (through 2011) the time for issuing New York Liberty Zone bonds effective for bonds issued after December 31, 2009. <br />
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<b>Extension of increased rehabilitation credit for historic structures in the Gulf Opportunity Zone</b>. The bill extends for two years (through 2011) the increased rehabilitation credit for qualified expenditures in the Gulf Opportunity Zone. The Gulf Opportunity Zone Act of 2005 increased the rehabilitation credit from 10 percent to 13 percent of qualified expenditures for any qualified rehabilitated building other than a certified historic structure, and from 20 percent to 26 percent of qualified expenditures for any certified historic structure. <br />
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<b>One-year extension of Gulf Opportunity Zone low-income housing placed-in-service date</b>. The Gulf Opportunity Zone Act of 2005 provided an additional allocation of low-income housing tax credits to the Gulf Opportunity Zone in an amount equal to the product of $18.00 multiplied by the portion of the State population which is in the Gulf Opportunity Zone. The additional allocations were made in calendar years 2006, 2007, and 2008, and required that the properties be placed in service before January 1, 2011. The bill extends that placed-in-service date for one year (through 2011). <br />
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<b>Extension of Tax-Exempt Bonds for the Gulf Opportunity Zone</b>. Under current law, bonds were authorized to help rebuild areas devastated by Hurricane Katrina and must be issued by December 31, 2010. The amendment provides one additional year to utilize these bonds, through December 31, 2011.<br />
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<b>Temporary Depreciation Allowance for Gulf Opportunity Zone Property</b>. The bill extends for two years, through 2011, an additional depreciation deduction claimed by businesses equal to 50 percent of the cost of new property investments made in the Gulf Opportunity Zone. The provision makes expenditures in 2011 eligible provided the property is placed in service by December 31, 2011.</blockquote><br />
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<u><b>Links</b></u><br />
<ul><li><a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:SP04753:">Library of Congress' Thomas listing for S.A. 4753</a> (listing at the top of this page is a link to the Senate's website).</li>
<li>CCH Special Report: <a href="http://tax.cchgroup.com/downloads/files/pdfs/legislation/bush-taxcuts.pdf">Senate Set To Approve Two-Year Extension Of Bush-Era Tax Cuts, Payroll Tax Relief And Estate Tax Compromise</a> (December 10, 2010).</li>
</ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-89239756532263341632010-12-09T19:03:00.000-07:002010-12-09T19:03:35.475-07:00Extension of the Bush tax cuts - It ain't over until 2 of the 3 branches of government singNo doubt you've been hearing about the continuing dance between President Obama, the Democrats, and the Republicans: Extend the Bush tax cuts for only some? If so, for who? For all? What else will it take to pass? <br />
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Short answer: Who knows? What just yesterday seemed like a bit of welcome certainty was replaced today with additional opposition and infighting. Nevertheless, my <i>personal </i>feeling is that they probably will eventually be extended, including for upper-income taxpayers. But then again, that and $5 will get you an iced cappuccino.<br />
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At this point, a bit of background is in order. What exactly *are* the "Bush Tax Cuts" that are dominating the news? In short, they are as follows (quoting CCH's<i> Sunset of the 2001 & 2003 Tax Relief Acts: Law, Explanation & Analysis</i>):<br />
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<blockquote>On May 26, 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The Act included cuts in marginal income tax rates, marriage penalty relief, the phase-out and ultimate repeal of the estate tax, and more, as well as a complicated series of phase-in rules and effective dates. The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which was signed into law on May 28, 2003, accelerated many of the tax cuts set in motion under EGTRRA. Commonly referred to as the “Bush Tax Cuts,” these two Acts made changes to over 50 provisions of the Internal Revenue Code and impacted a wide variety of taxpayers.<br />
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In order to comply with budget requirements, however, each provision in EGTRRA was subject to a sunset provision. Pursuant to the sunset provision, the changes made by EGTRRA would no longer apply after December 31, 2010. The provisions contained in JGTRRA were subject to similar sunset rules. When EGTRRA and JGTRRA were enacted with these sunset provisions, few members of Congress expected those sunsets to ever take place. But, with mere months before the sunset occurs, it is not clear what, if anything, Congress will do to extend these tax cuts. This uncertainty in the tax law generates a myriad of complexities for taxpayers and tax professionals.<br />
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<b><u>Impact on Individuals</u></b><br />
<ul><li><b>Individual, Estate and Trust Tax Rates</b>. Temporary decreases in the marginal tax rates for noncorporate taxpayers are scheduled to expire for tax years beginning after 2010. Thus, the tax rates for individuals, estates and trusts will revert to 15, 18, 31, 36 and 39.6 percent, and the 10-percent rate for individuals will disappear (Code Sec. 1).</li>
<li><b>15-Percent Tax Rate Bracket for Joint Filers</b>. Marriage penalty relief that increased size of the 15-percent tax bracket for joint filers to twice the size of the corresponding rate bracket for single filers is scheduled to expire for tax years beginning after 2010 (Code Sec. 1).</li>
<li><b>Standard Deduction for Married Taxpayers</b>. The increased standard deduction amounts for married taxpayers based on the amount allowed for single taxpayers are scheduled to expire for tax years beginning after December 31, 2010. Thus, the basic standard deduction will be $5,000 for joint filers, and $2,500 for married taxpayers filing separately, both as adjusted annually for inflation (Code Sec. 63).</li>
<li><b>Limit on Itemized Deductions for Higher-Income Individuals</b>. The limitation on the amount of allowable itemized deductions for higher-income individuals is scheduled to be reinstated for tax years beginning after 2010. Thus, taxpayers with AGI in excess of the applicable levels will have to the reduce the amount of itemized deductions they actually deduct (Code Sec. 68).</li>
<li><b>Phaseout of Personal Exemptions</b>. The elimination of the phaseout of personal exemptions for higher-income taxpayers is scheduled to expire for tax years beginning after 2010. Thus, higher income taxpayers will have to reduce the amount of their personal exemptions when their AGI exceeds certain thresholds (Code Sec. 151(d)(3)).</li>
<li><b>Coverdell Education Savings Accounts</b>. Several modifications of Coverdell education savings accounts are scheduled to expire for tax years beginning after 2010. The annual contribution limit will revert to $500, the AGI ceilings for eligible contributors will reflect a marriage penalty, elementary and secondary school costs will not be qualified educational expenses, and several extended deadlines will no longer apply (Code Sec. 530).</li>
<li><b>Employer-Provided Educational Assistance</b>. An employee’s annual exclusion of up to $5,250 in employer-provided educational assistance is scheduled to expire for tax years beginning after 2010 (Code Sec. 127).</li>
<li><b>Excludable Federal Health Scholarships</b>. The exclusion from gross income for certain federal and military medical scholarships that include obligatory service requirements is scheduled to expire for tax years beginning after 2010 (Code Sec. 117).</li>
<li><b>Student Loan Interest Deduction</b>. Expansions of the student loan interest deduction are scheduled to expire for tax years beginning after 2010, so that the deduction will not apply to voluntary interest payments or interest paid after the first 60 months of repayment, and the deduction will phase out at lower AGI levels (Code Sec. 221).</li>
<li><b>Tuition deduction</b>. For tax years beginning after 2009, the above-the-line deduction for qualified tuition and related expenses expires (Code Sec. 222).</li>
<li><b>Earned Income Tax Credit</b>. Several changes to the earned income credit are scheduled to expire for tax years beginning after 2010, so that the credit phase-outs will be based on modified AGI and will include a larger marriage penalty, earned income will no longer be limited to amounts included in gross income, the credit will be reduced by the taxpayer’s AMT liability, and the IRS will no longer be authorized to deny the credit based on information from the federal child support database (Code Sec. 32).</li>
<li><b>Child Tax Credit</b>. The child credit is scheduled to revert to $500 for tax years beginning after 2010, and the refundable credit will be limited to taxpayers with at least three qualifying children (via the supplemental child credit component of the earned income credit) (Code Sec. 24).</li>
<li><b>Child and Dependent Care Credit</b>. The child and dependent care credit is scheduled to decrease for tax years beginning after 2010 because of reductions in the credit percentage, creditable expenses, and income phase-outs (Code Sec. 21).</li>
<li><b>Adoption Credit and Adoption Assistance Programs</b>. For tax years beginning after 2011, the maximum adoption credit is scheduled to revert to $5,000 ($6,000 for a child with special needs) and the exclusion for employer-paid or employer-reimbursed adoption expenses is scheduled to expire (Code Secs. 36C and 137).</li>
<li><b>Alternative Minimum Tax Exemption</b>. The AMT exemption amounts for tax years beginning after 2009 are $45,000 for married individuals filing joint returns and surviving spouses, $33,750 for unmarried individuals and $22,500 for married individuals filing separate returns (Code Sec. 55).</li>
</ul><br />
<b><u>Impact on Business and Investment</u></b><br />
<ul><li><b>Capital Gains Tax Rates</b>. General reductions in the maximum tax rates for noncorporate taxpayers’ capital gains are scheduled to expire for tax years beginning after 2010, so that the maximum rate will be 20 percent (10 percent for taxpayers in the 15-percent income tax bracket). These rated will be reduced to 18 percent and 8 percent, respectively, for qualified five-year gain (Code Secs. 1(h) and 55(b)(3)(C)).</li>
<li><b>AMT Preference for Small Business Stock</b>. The amount of excluded gain on small business stock that is treated as an alternative minimum tax (AMT) preference item is scheduled to increase for tax years beginning after 2010 (Code Sec. 57(a)(7)).</li>
<li><b>Dividends</b>. Dividends received by noncorporate taxpayers (including dividends received through mutual funds, REITs and other pass-through entities) are scheduled to be taxed as ordinary income, rather than as capital gains, for tax years beginning after 2010 (Code Sec. 1(h)(11)).</li>
<li><b>Credit for Employer-Provided Child Care Facilities</b>. The income tax credit for qualified expenses incurred by an employer in providing child care for employees is scheduled to expire for tax years beginning after 2010 (Code Sec. 45F).</li>
<li><b>Accumulated Earnings Tax Rate</b>. The tax rate on corporate accumulated earnings is scheduled to revert to 39.6 percent from 15 percent for tax years beginning after 2010 (Code Sec. 531).</li>
<li><b>Personal Holding Company Tax Rate</b>. The tax rate on personal holding companies is scheduled to revert to 39.6 percent from 15 percent for tax years beginning after 2010 (Code Sec. 541).</li>
<li><b>Collapsible Corporations</b>. The collapsible corporation rules are scheduled to take effect again for tax years beginning after 2010, so that shareholders’ distributions and gain on stock sales may constitute ordinary income rather than capital gain (Code Sec. 341).</li>
<li><b>Alaska Native Settlement Trusts</b>. Several special rules for calculating, taxing and reporting the income of Alaska Settlement Trusts and their beneficiaries are scheduled to expire for tax years beginning after 2010 (Code Secs. 646 and 6039H).</li>
<li><b>Rebate Exception for School Construction Bonds</b>. The amount of public schools bonds that small governmental units may issue without being subject to arbitrage rebate requirements is scheduled to revert to $10 million from $15 million for tax years beginning after 2010 (Code Sec. 148).</li>
<li><b>Exempt Facility Bonds</b>. The treatment of public school bonds as exempt facility bonds is scheduled to expire for tax years beginning after 2010 (Code Sec. 142(a)(13)).</li>
</ul><b><u>Impact on Estate, Gift, and Generation-Skipping Taxes</u></b><br />
<ul><li><b>Estate and Generation-Skipping Transfer Taxes</b>. The one-year repeal of federal estate and generation-skipping transfer (GST) taxes is scheduled to expire, so that federal estate and GST taxes will again apply to the estates of decedents dying and GSTs made after 2010.</li>
<li><b>Transfer Tax Rates</b>. Lower transfer tax rates are scheduled to expire with respect to the estates of decedents dying and gifts and GSTs made after 2010, so that the maximum rate will again be 55 percent, and a five-percent surtax will apply to many estates and gifts that exceed $10 million (Code Sec. 2001).</li>
<li><b>Transfer Tax Exclusion and Exemption Amounts</b>. The increases in the estate tax applicable exclusion amount and the GST tax exemption amount are scheduled to expire, so that the estate tax applicable exclusion amount for decedents dying and GSTs made after 2010 will be $1 million (as adjusted for inflation) (Code Secs. 2010 and 2505).</li>
<li><b>Qualified Family-Owned Business Interest Deduction</b>. The qualified family-owned business interest (QFOBI) deduction is scheduled to be restored for estates of decedents dying after 2010, so up to $675,000 of the adjusted value of QFOBIs will be excludable by an electing estate (Code Sec. 2057).</li>
<li><b>State Death Taxes</b>. For the estates of decedents dying after 2010, the tax credit for estate, inheritance, legacy, or succession taxes paid to any state or the District of Columbia is scheduled to be restored, and the state death tax deduction is scheduled to expire (Code Secs. 2011 and 2058).</li>
<li><b>Estate Tax Exclusion for Qualified Conservation Easements</b>. The easing of location requirements for an estate’s excludable qualified conservation easements is scheduled to expire for decedent’s dying after 2010 (Code Sec. 2031(c)).</li>
<li><b>Basis for Property Acquired from a Decedent</b>. The modified carryover basis rules applicable to property acquired from a decedent are scheduled to expire for persons dying after 2010, so that the income tax basis of property acquired from a decedent at death generally will be stepped-up (or down) to its value as of the date of the decedent’s death. Executor reporting requirements and penalty provisions relating to the carryover-basis regime are also scheduled to expire (Code Secs. 1014 and 1022).</li>
<li><b>Income Tax Exclusion for Sale of Principal Residence</b>. The exclusion from gross income for gain realized on the sale of a decedent’s principal residence by the estate, heir or qualified revocable trust is scheduled to expire for decedent’s dying after 2010 (Code Sec. 121(d)(11)).</li>
<li><b>Gain on Distributions of Appreciated Property</b>. The limitation on the recognition of gain on appreciated carryover basis property in satisfaction of a pecuniary bequest (or an equivalent distribution from a trust) is scheduled to expire for estates of decedents dying (or trust distributions made) after 2010, so the limitation will again apply only to transfers of appreciated farm or closely held business real estate (Code Sec. 1040).</li>
<li><b>Miscellaneous Amendments to Incorporate Carryover Basis Rules</b>. Several amendments to the Internal Revenue Code that incorporated the modified carryover basis rules are scheduled to expire with respect to decedents dying after 2010, including: the recognition of gain on transfers of assets by a U.S. person to a nonresident alien by bequest (Code Sec. 684); the capital gains treatment of the sale of certain inherited creative works (Code Sec. 1221(a)(3)(C)); the imposition of private foundation rules on split-interest trusts (Code Sec. 4947(a)(2)(A)); and the definition of the term "executor" (Code Sec. 7701(a)(47)).</li>
<li><b>Deemed and Retroactive Allocations of GST Exemption</b>. For purposes of the GST tax, the deemed allocation and retroactive allocation provisions are scheduled to expire for GSTs made after 2010 (Code Sec. 2632).</li>
<li><b>Severing a Trust</b>. The provision allowing for a qualified severance of a trust for purposes of the GST tax is scheduled to expire for GSTs made after 2010 (Code Sec. 2642).</li>
<li><b>Modification of Valuation Rules</b>. The clarification of the valuation rules with respect to the determination of the inclusion ratio for GST tax purposes is scheduled to expire for transfers made after December 31, 2010 (Code Sec. 2642).</li>
<li><b>Late Elections and Substantial Compliance</b>. The provisions providing relief from late GST allocations and elections are scheduled to expire for GSTs made after 2010 (Code Sec. 2642).</li>
<li><b>Deferred Estate Tax Payments</b>. The expansion of eligibility for deferred estate tax payments is scheduled to expire for estates of decedents dying after 2010, so deferred payments will not be allowed if the decedent’s closely held business had more than 15 partners or shareholders (Code Sec. 6166(b)).</li>
<li><b>Estate Tax Installment Payments and Stock in Lending and Finance Businesses</b>. The rule permitting stock in qualifying lending and financing entities to be treated as stock in an active trade or business for purposes of the election to pay estate tax in installments is scheduled to expire for decedents dying after 2010 (Code Sec. 6166(b)).</li>
<li><b>Estate Tax Installment Payments and Holding Company Stock</b>. Special rules regarding holding company stock are scheduled to expire for decedents dying after 2010,, so the rule requiring that stock in a holding company must be non-readily tradable in order to qualify for purposes of the installment payment rules will apply to operating subsidiaries, as well as the holding company (Code Sec. 6166(b)). </li>
</ul></blockquote><br />
<br />
<br />
So there you have it. Probably more than you wanted to know, but that's often how it goes in the wonderful world of tax!<br />
<br />
<br />
<br />
<u><b>Links/Additional Reading</b></u>:<br />
<ul><li><b>U.S. Government Printing Office</b>: Text of Public Law 107-16 (The Economic Growth And Tax Relief Reconciliation Act Of 2001 or "EGTRRA") [<a href="http://www.gpo.gov/fdsys/pkg/PLAW-107publ16/pdf/PLAW-107publ16.pdf">http://www.gpo.gov/fdsys/pkg/PLAW-107publ16/pdf/PLAW-107publ16.pdf</a>]</li>
<li><b>U.S. Government Printing Office</b>: Text of Public Law108-27 (The Jobs And Growth Tax Relief Reconciliation Act Of 2003 or "JGTRRA") [<a href="http://www.gpo.gov/fdsys/pkg/PLAW-108publ27/pdf/PLAW-108publ27.pdf">http://www.gpo.gov/fdsys/pkg/PLAW-108publ27/pdf/PLAW-108publ27.pdf</a>] </li>
<li><b>Joint Committee on Taxation</b>: Summary Of Provisions Contained In The Conference Agreement For H.R. 1836, The Economic Growth And Tax Relief Reconciliation Act Of 2001 [<a href="http://www.jct.gov/publications.html?func=download&id=2003&chk=2003&no_html=1">http://www.jct.gov/publications.html?func=download&id=2003&chk=2003&no_html=1</a>]</li>
<li><b>Joint Committee on Taxation</b>: Summary Of Conference Agreement On H.R. 2, Jobs And Growth Tax Relief Reconciliation Act Of 2003 [<a href="http://www.jct.gov/publications.html?func=download&id=1747&chk=1747&no_html=1">http://www.jct.gov/publications.html?func=download&id=1747&chk=1747&no_html=1</a>]</li>
<li><b>Tax Policy Center</b> (Urban Institute and Brookings Institution): The Tax Policy Briefing Book, A Citizens' Guide for the 2008 Election and Beyond - Bush Tax Cuts [<a href="http://www.taxpolicycenter.org/upload/Background/I-11thru1-14TheBushTaxCuts.final.pdf">http://www.taxpolicycenter.org/upload/Background/I-11thru1-14TheBushTaxCuts.final.pdf</a>]</li>
<li><b>CCH</b>: EGTRRA Sunset Brings New Challenges to Planning for 2011 [<a href="http://www.cchgroup.com/opencms/opencms/web/TAA/PDFs/legislation/sunsettax.pdf">http://www.cchgroup.com/opencms/opencms/web/TAA/PDFs/legislation/sunsettax.pdf</a>] </li>
</ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-19394221708655753832010-11-17T14:40:00.000-07:002010-11-17T14:40:56.996-07:00Thank you IRS! IRS Website Provides links to Tax Code, Regulations and Official Guidance<span style="font-size: small;">For those of us who practice in the tax arena, getting access to the Internal Revenue Code ("IRC"), Treasury Regulations, and other official guidance is usually not a problem.</span><br />
<br />
<span style="font-size: small;">However, for the average person who wants to look up a specific IRC section they've heard about (e.g., <a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001221----000-.html">section 1221</a> which defines a "capital asset" in determining whether a disposition of an asset gives rise to a capital gain or loss), it's often a frustrating task. And let's not even get started on where they can find Treasury Regulations or various IRS pronouncements (like IRS Revenue Rulings).</span><br />
<br />
<span style="font-size: small;">Thankfully, the IRS in an effort to make the increasingly-complex tax law more accessible to the public, has created a resource that puts a portal to these authorities right on its website at <a href="http://www.irs.gov/taxpros/article/0,,id=98137,00.html">http://www.irs.gov/taxpros/article/0,,id=98137,00.html</a>.</span><br />
<br />
<span style="font-size: small;">Moreover, it has even provided a page entitled <a href="http://www.irs.gov/irs/article/0,,id=101102,00.html">Understanding IRS Guidance - A Brief Primer</a> that explains the relevance of a number of different types of authorities. Since it's fairly brief (just like the title), I've reproduced it here:</span><br />
<blockquote><blockquote style="font-family: Arial,Helvetica,sans-serif;"><i><span style="font-size: small;">For anyone not familiar with the inner workings of tax administration, the array of IRS guidance may seem, well, a little puzzling at first glance. To take a little of the mystery away, here's a brief look at seven of the most common forms of guidance.</span></i><br />
<i><br />
</i><i><span style="font-size: small;">In its role in administering the tax laws enacted by the Congress, the IRS must take the specifics of these laws and translate them into detailed regulations, rules and procedures. The Office of Chief Counsel fills this crucial role by producing several different kinds of documents and publications that provide guidance to taxpayers, firms and charitable groups.</span></i><br />
<i><br />
</i><i><span style="font-size: small;"><b>Regulation</b></span></i><br />
<i><span style="font-size: small;">A regulation is issued by the Internal Revenue Service and Treasury Department to provide guidance for new legislation or to address issues that arise with respect to existing Internal Revenue Code sections. Regulations interpret and give directions on complying with the law. Regulations are published in the Federal Register. Generally, regulations are first published in proposed form in a Notice of Proposed Rulemaking (NPRM). After public input is fully considered through written comments and even a public hearing, a final regulation or a temporary regulation is published as a Treasury Decision (TD), again, in the Federal Register.</span></i><br />
<i><br />
</i><i><span style="font-size: small;"><b>Revenue Ruling</b></span></i><br />
<i><span style="font-size: small;">A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts. Revenue rulings are published in the Internal Revenue Bulletin for the information of and guidance to taxpayers, IRS personnel and tax professionals. For example, a revenue ruling may hold that taxpayers can deduct certain automobile expenses.</span></i><br />
<i><br />
</i><i><span style="font-size: small;"><b>Revenue Procedure</b></span></i><br />
<i><span style="font-size: small;">A revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties and regulations and that should be a matter of public knowledge. It is also published in the Internal Revenue Bulletin. While a revenue ruling generally states an IRS position, a revenue procedure provides return filing or other instructions concerning an IRS position. For example, a revenue procedure might specify how those entitled to deduct certain automobile expenses should compute them by applying a certain mileage rate in lieu of calculating actual operating expenses.</span></i><br />
<i><br />
</i><i><span style="font-size: small;"><b>Private Letter Ruling</b></span></i><br />
<i><span style="font-size: small;">A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. A PLR is issued to establish with certainty the federal tax consequences of a particular transaction before the transaction is consummated or before the taxpayer's return is filed. A PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. A PLR may not be relied on as precedent by other taxpayers or IRS personnel. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued.</span></i><br />
<i><br />
</i><i><span style="font-size: small;"><b>Technical Advice Memorandum</b></span></i><br />
<i><span style="font-size: small;">A technical advice memorandum, or TAM, is guidance furnished by the Office of Chief Counsel upon the request of an IRS director or an area director, appeals, in response to technical or procedural questions that develop during a proceeding. A request for a TAM generally stems from an examination of a taxpayer's return, a consideration of a taxpayer's claim for a refund or credit, or any other matter involving a specific taxpayer under the jurisdiction of the territory manager or the area director, appeals. Technical Advice Memoranda are issued only on closed transactions and provide the interpretation of proper application of tax laws, tax treaties, regulations, revenue rulings or other precedents. The advice rendered represents a final determination of the position of the IRS, but only with respect to the specific issue in the specific case in which the advice is issued. Technical Advice Memoranda are generally made public after all information has been removed that could identify the taxpayer whose circumstances triggered a specific memorandum.</span></i><br />
<i><br />
</i><i><span style="font-size: small;"><b>Notice</b></span></i><br />
<i><span style="font-size: small;">A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.</span></i><br />
<i><br />
</i><i><span style="font-size: small;"><b>Announcement</b></span></i><br />
<i><span style="font-size: small;">An announcement is a public pronouncement that has only immediate or short-term value. For example, announcements can be used to summarize the law or regulations without making any substantive interpretation; to state what regulations will say when they are certain to be published in the immediate future; or to notify taxpayers of the existence of an approaching deadline.</span></i><br />
<br />
<i><span style="font-size: small;"> </span></i><br />
<div style="text-align: right;"><i><span style="font-size: small;">Page Last Reviewed or Updated [by IRS]: October 06, 2010</span></i></div></blockquote></blockquote>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-86507328010481765232010-11-11T17:50:00.000-07:002010-11-17T12:27:17.421-07:00Unrealized Built-in Gains and Losses Under Section 382 and the Tax Accounting Rules<i><b>Originally published in <u>The Tax Adviser</u>, November 2010 </b></i>[<a href="http://www.aicpa.org/Publications/TaxAdviser/2010/November/Pages/clinic_nov10-story-10.aspx">http://www.aicpa.org/Publications/TaxAdviser/2010/November/Pages/clinic_nov10-story-10.aspx</a>] <br />
<br />
Many practitioners already know that section 382 generally limits the use of a corporation’s net operating losses (NOLs) in cases where there is an increase in ownership of more than 50 percentage points by one or more 5% shareholders during a three-year testing period.<br />
<br />
Many practitioners also know that section 382 addresses cases in which corporations have either net unrealized built-in gains (NUBIGs) or net unrealized built-in losses (NUBILs) as of the ownership change date. In such cases, under section 382(h) generally,<br />
<ol><li>For corporations with NUBIGs, a year’s section 382 limitation is increased by recognized built-in gains for that year during the five-year recognition period following the change or</li>
<li>For corporations with NUBILs, recognized built-in losses for a year during the five-year recognition period following the change are treated as if they were pre-change NOLs.</li>
</ol><br />
Section 382(h)(3)(A) defines the terms NUBIG and NUBIL as the amounts by which the fair market value (FMV) of the corporation’s assets immediately before an ownership change is more or less, respectively, than the aggregate adjusted basis of such assets at such time.<br />
<br />
Interestingly, what practitioners and taxpayers sometimes do not consider is section 382(h)(6)(C)’s requirement that NUBIGs and NUBILs must generally be further adjusted for items of accrued income and accrued deductions attributable to the pre-change period (to the extent not already recognized as of the change date).<br />
<br />
This provision can yield unexpected results (sometimes good, sometimes bad). As shown in Example 1, it can mean that a corporation that at first appears to have a NUBIL might actually have a NUBIG. Alternatively (as shown in Example 2 below), given a seemingly minor factual difference, it can mean a corporation that at first appears not to have a NUBIL might not be able to avoid having one.<br />
<br />
<b><span style="font-style: italic;">Example 1</span>: </b>All amounts are determined as of the change date (December 31, year 1). Legal settlement accrual is reasonably ascertainable in amount but is not agreed to or paid until January 5, year 2 (i.e., neither the all-events test of section 461(h)(4) nor economic performance per section 461(h)(1) is met as of the change date).<br />
<br />
The corporation has a net unrealized built-in gain of $1.7 million, computed as follows (see exhibit below):<br />
<ul><li><span style="font-style: italic;">Intangible</span>: The FMV exceeds the basis by $2 million. </li>
<li><span style="font-style: italic;">Land</span>: The basis exceeds the FMV by $300,000. </li>
<li><span style="font-style: italic;">Accrued legal settlement (related to a tort)</span>: This $3 million amount is excluded from the calculation because it did not represent a proper accrual (aside from required economic performance) as of the change date. Therefore, it is not treated as being attributable to the pre-change period and is not a component of any NUBIG or NUBIL. </li>
</ul><br />
<b><span style="font-style: italic;">Example 2</span>: </b>All amounts are determined as of the change date (December 31, year 1). Legal settlement accrual is reasonably ascertainable in amount and is agreed to but is not paid until January 5, year 2 (i.e., the all-events test is met as of the change date, with economic performance occurring after the change date). Pre-change NOLs are $500,000. The section 382 limitation is $1 million.<br />
<br />
The corporation has a net unrealized built-in loss of $1.3 million, computed as follows (see exhibit below):<br />
<ul><li><span style="font-style: italic;">Intangible</span>: The FMV exceeds the basis by $2 million.<span style="font-style: italic;"> </span></li>
<li><span style="font-style: italic;">Land</span>: The basis exceeds the FMV by $300,000. </li>
<li><span style="font-style: italic;">Accrued legal settlement (related to a tort)</span>: This $3 million amount is included in the calculation because the deduction was a proper accrual at the change date under the all-events test but was deferred until paid under section 461(h)(2)(C). Therefore, it is treated as being attributable to the pre-change period and is a component of any NUBIG or NUBIL. </li>
</ul>This means that the deduction (to the extent of the NUBIL of $1.3 million) is lumped together with the corporation’s pre-change NOLs and (in this case) is subject to the section 382 limitation as a realized built-in loss.<br />
<br />
<i><b>Exhibit</b></i><br />
<br />
<table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: medium none; margin-left: 18.9pt; width: 606px;"><tbody>
<tr> <td style="border: 1pt solid windowtext; padding: 0in 5.4pt; width: 171pt;" valign="top" width="228"><div align="center" class="MsoNormal" style="margin-bottom: 0.0001pt; text-align: center;"><br />
</div></td> <td style="border-color: windowtext windowtext windowtext -moz-use-text-color; border-style: solid solid solid none; border-width: 1pt 1pt 1pt medium; padding: 0in 5.4pt; width: 94.5pt;" valign="top" width="126"><div align="center" class="MsoNormal" style="margin-bottom: 0.0001pt; text-align: center;"><b>Tax Basis</b></div></td> <td style="border-color: windowtext windowtext windowtext -moz-use-text-color; border-style: solid solid solid none; border-width: 1pt 1pt 1pt medium; padding: 0in 5.4pt; width: 94.5pt;" valign="top" width="126"><div align="center" class="MsoNormal" style="margin-bottom: 0.0001pt; text-align: center;"><b>Fair Market</b></div><div align="center" class="MsoNormal" style="margin-bottom: 0.0001pt; text-align: center;"><b>Value</b></div></td> <td style="border-color: windowtext windowtext windowtext -moz-use-text-color; border-style: solid solid solid none; border-width: 1pt 1pt 1pt medium; padding: 0in 5.4pt; width: 94.5pt;" valign="top" width="126"><div align="center" class="MsoNormal" style="margin-bottom: 0.0001pt; text-align: center;"><b>Difference</b></div></td> </tr>
<tr> <td style="border-color: -moz-use-text-color windowtext windowtext; border-style: none solid solid; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 171pt;" valign="top" width="228"><div class="MsoNormal" style="margin-bottom: 0.0001pt;"><b><i>Assets</i></b></div></td> <td style="background: none repeat scroll 0% 0% rgb(191, 191, 191); border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;"><br />
</div></td> <td style="background: none repeat scroll 0% 0% rgb(191, 191, 191); border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;"><br />
</div></td> <td style="background: none repeat scroll 0% 0% rgb(191, 191, 191); border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;"><br />
</div></td> </tr>
<tr> <td style="border-color: -moz-use-text-color windowtext windowtext; border-style: none solid solid; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 171pt;" valign="top" width="228"><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.25in;">Intangible</div></td> <td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;">0</div></td> <td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;">2,000,000</div></td> <td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;">2,000,000</div></td> </tr>
<tr> <td style="border-color: -moz-use-text-color windowtext windowtext; border-style: none solid solid; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 171pt;" valign="top" width="228"><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.25in;">Land</div></td> <td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;">2,000,000</div></td> <td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;">1,700,000</div></td> <td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;">(300,000)</div></td> </tr>
<tr> <td style="border-color: -moz-use-text-color windowtext windowtext; border-style: none solid solid; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 171pt;" valign="top" width="228"><div class="MsoNormal" style="margin-bottom: 0.0001pt;"><b><i>Liabilities</i></b></div></td> <td style="background: none repeat scroll 0% 0% rgb(191, 191, 191); border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;"><br />
</div></td> <td style="background: none repeat scroll 0% 0% rgb(191, 191, 191); border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;"><br />
</div></td> <td style="background: none repeat scroll 0% 0% rgb(191, 191, 191); border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;"><br />
</div></td> </tr>
<tr> <td style="border-color: -moz-use-text-color windowtext windowtext; border-style: none solid solid; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 171pt;" valign="top" width="228"><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.25in;">Accrued legal settlement (tort)</div></td> <td style="background: none repeat scroll 0% 0% rgb(191, 191, 191); border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;"><br />
</div></td> <td style="background: none repeat scroll 0% 0% rgb(191, 191, 191); border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;"><br />
</div></td> <td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; text-align: right; width: 94.5pt;" valign="top" width="126"><div class="MsoNormal" style="margin-bottom: 0.0001pt;">(3,000,000)</div></td> </tr>
</tbody></table><br />
Using the numbers above, there would be a post-change deemed NOL of $1.8 million (pre-change losses of $500,000 plus $1.3 million of realized built-in losses), which could only offset income in the subsequent year (December 31, year 2) of up to the $1 million section 382 limitation, with the remainder ($800,000) of the disallowed realized built-in losses being carried forward under the rules applicable to NOLs.<br />
<br />
While these two examples are admittedly simple (and focus only on accrued deductions), they do make one thing clear—corporate tax practitioners must pay close attention not only to the unrealized gains and losses inherent in a corporation’s assets when facing a section 382 limitation, but also to those less-obvious items of accrued income and expense. In fact, the author was approached about a year ago by another practitioner on a matter fairly similar to Example 1 above, where the numbers were many times higher than those given here. As a result, what initially looked like a large NUBIL instead turned out to be a substantial NUBIG, much to the relief of all involved.<br />
<br />
<u><i>Bottom line</i></u>: Don't forget to consider the tax accounting method rules (for accrued income or expense items) when dealing with section 382.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-34501011132406554492010-10-04T13:09:00.000-06:002010-10-04T13:13:39.528-06:00Enhanced Federal Research Tax Credits? Hopefully, but not quite yet...By now, many have already heard about how President Obama signed the Small Business Jobs Act of 2010 into law on September 27. Rather than go into a detailed discussion of the Act, I'd like to clarify two particular items that seem to be widely misreported.<br />
<br />
In short, the federal research tax credit does <u><b>not</b></u> (under current law) qualify for either of the following provisions in the new law: <br />
<ul><li><u>Five-year carryback of general business credit of eligible small business</u> - This provision extends the carryback period for eligible small business tax credits from one to five years for eligible small business taxpayers. However, this provision is only effective for credits <b style="color: black;"><i>determined</i></b><span style="color: black;"> (i.e., generated) in the taxpayer's first taxable year beginning after December 31, 2009. And since the federal research tax credit has (under current law as of the time of this writing) expired for qualified expenditures paid/incurred after December 31, 2009, there are no federal research tax credits to be </span><b style="color: black;"><i>determined</i></b> during that period.</li>
</ul><ul><li><u style="color: black;">General business credit of eligible small business not subject to alternative minimum tax</u><span style="color: black;"> - This provision effectively allows eligible small business tax credits to offset an eligible small business taxpayer's AMT liability. However (similar to the 5-year carryback provision), this provision is only effective for credits </span><b style="color: black;"><i>determined</i></b> (i.e., generated) in the taxpayer's first taxable year beginning after December 31, 2009. Again, since the federal research tax credit has (under current law as of the time of this writing) expired for qualified expenditures paid/incurred after December 31, 2009, there are no federal research tax credits to be <b style="color: black;"><i>determined</i></b> during that period.</li>
</ul><br />
Despite this bad (and hopefully temporary) news, there is still hope that Congress will extend the federal research tax credit retroactively from January 1, 2010, but we'll have to wait and see about that. As for my personal thoughts on the prospects of a retroactive extension, I think there's a good chance of it for the following reasons:<br />
<ul><li>President Obama on September 8 has already identified the federal research tax credit as an important item (see <a href="http://tax-fishing-and-other.blogspot.com/2010/09/white-house-releases-research-tax.html">http://tax-fishing-and-other.blogspot.com/2010/09/white-house-releases-research-tax.html</a>).</li>
<li>The House (albeit back in January 2009) introduced H.R. 422 which would (1) extend the regular federal research tax credit through December 31, 2010, (2) increase the Alternative Simplified Credit ("ASC") method of computing the federal research tax credit to 20%, and (3) make the ASC permanent. So there is (or at least was) clearly some support in the House as it was introduced with 105 co-sponsors.</li>
<li>The Senate (albeit back in June 2009) introduced S. 1203, which effectively mirrors H.R. 422. So there is (or at least was) clearly some support in the Senate as it was introduced with 22 co-sponsors.</li>
</ul><br />
<br />
<br />
<i><u>Note</u>: The Act was passed by Congress as H.R. 5297 and became Public Law No. 111-240 when it was signed into law.</i><br />
<br />
Links:<br />
<ul><li><a href="http://www.jct.gov/publications.html?func=startdown&id=3707">Joint Committee on Taxation's writeup (JCX-47-10)</a></li>
<li><a href="http://hdl.loc.gov/loc.uscongress/legislation.111hr5297">H.R. 5297 on Thomas (at the Library of Congress)</a></li>
<li><a href="http://hdl.loc.gov/loc.uscongress/legislation.111hr422">H.R. 422 on Thomas (at the Library of Congress)</a></li>
<li><a href="http://hdl.loc.gov/loc.uscongress/legislation.111s1203">S. 1203 on Thomas (at the Library of Congress)</a></li>
</ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-81402421279437275812010-10-01T15:19:00.000-06:002010-10-01T17:56:45.668-06:00IRS has released its finalized (and revised) Schedule UTP for reporting Uncertain Tax PositionsFor those working in the corporate tax arena, you probably remember the controversy surrounding the IRS's January 2010 announcement of their plan to create a new tax form to disclose a taxpayer's "uncertain tax positions" (see <a href="http://tax-fishing-and-other.blogspot.com/2010/02/uncertain-tax-positions-policy-of.html">http://tax-fishing-and-other.blogspot.com/2010/02/uncertain-tax-positions-policy-of.html</a>).<br />
<br />
As you probably also know, they followed that announcement with an advance copy in April of the proposed version of the form, and requested comments on it. (see <a href="http://tax-fishing-and-other.blogspot.com/2010/04/irs-announcement-2010-30-re-disclosure.html">http://tax-fishing-and-other.blogspot.com/2010/04/irs-announcement-2010-30-re-disclosure.html</a>).<br />
<br />
Well, just last Friday, the IRS released its revised and finalized version of Schedule UTP, along with explanatory Announcements 2010-75 and 2010-76.<b><span style="color: red;"></span></b><br />
<br />
<u><i>First, the "good" news</i></u>:<br />
<br />
To their credit, the IRS made some significant changes to the April draft version of Schedule UTP in response to public comments. Key among these changes are:<br />
<ul><li><u>Five-year phase-in of the reporting requirement based on a corporation’s asset size</u> - As originally proposed in January, the reporting requirement would apply to business taxpayers with total assets of at least $10 million. In April, the IRS announced that only certain corporations would be required to file the schedule. With their latest revision, 2010 Schedule UTP filings will <i><b>generally</b></i> only be required for corporations that issue (or are included in) audited financial statements and that have at least $100 million of assets. The asset threshold will be reduced to $50 million starting with 2012 tax years and down to $10 million starting with 2014 tax years. In addition, the IRS will consider whether to apply the UTP reporting rules to other taxpayers for 2011 or later years (e.g., for pass-through and/or tax-exempt entities).</li>
<li><u>No longer being required to report the maximum tax adjustment amounts</u> - While the April draft contemplated that the reporting corporation would disclose a maximum potential tax adjustment (i.e., the maximum US federal income tax liability for the tax position if not sustained upon IRS audit), the IRS ultimately removed this proposed requirement. It replaced this provision with a requirement for the reporting corporation to rank its UTPs by size (e.g., in descending order), as well as identify those positions that exceed 10% of the total reported positions. The size of the UTP is determined at the affiliated group level.</li>
<li><u>No longer being required to report the rationale and nature of uncertainty in the concise description of the position</u> - In response to commentators' concerns, including the fact that such disclosures are not required by FIN 48 (now known as FASB ASC 740-10), the instructions have limited the description of the UTP to "<i>a concise description of the tax position, including a description of the relevant facts affecting the tax treatment of the position and information that reasonably can be expected to apprise the Service of the identity of the tax position and the nature of the issue.</i>" In addition, the final instructions expressly provide that a corporation is not required to include an assessment of the hazards of a tax position or an analysis of the support for or against the tax position.</li>
<li><u>No longer being required to report administrative practice tax positions</u> - The finalized instructions eliminated the requirement in the April draft that required reporting corporations to disclose tax positions for which a reserve had not been recorded based on an expectation to litigate or an IRS administrative practice (i.e., the IRS had historically not challenged the position upon audit when dealing with that tax position re that taxpayer or similar taxpayers).</li>
</ul><br />
In addition, no change (or merely clarification) was made to the instructions to provide that:<br />
<ul><li>An affiliated group of corporations filing a consolidated return will file a single Schedule UTP for the affiliated group for each year. </li>
<li>The affiliated group need not identify the member of the group to which the UTP relates.</li>
<li>A complete and accurate disclosure of a tax position on the appropriate year's Schedule UTP will be treated by the IRS as if the corporation filed a Form 8275 (Disclosure Statement) or Form 8275-R (Regulation Disclosure Statement) regarding the tax position. A separate Form 8275 or 8275-R need not be filed to avoid certain accuracy-related penalties with respect to that position.</li>
<li>Whether a reserve has been recorded for Schedule UTP disclosure is determined by reference to those reserve decisions made by the corporation (or related party) for audited financial statement purposes. If it was determined that (under applicable accounting standards) either no reserve was required because it was either immaterial or sufficiently certain, then it need not be reported on the schedule.</li>
<li>Schedule UTP requires the reporting of U.S. federal income tax positions but not foreign or state tax positions.</li>
<li>Corporations report their own tax positions on Schedule UTP and do not report the tax positions of a related party.</li>
<li>Tax positions taken in years before 2010 need not be reported in 2010 or a later year even if a reserve is recorded in audited financial statements issued in 2010 or later.</li>
<li>Schedule UTP need not be filed for short tax years ending in 2010.</li>
<li>Worldwide assets are used to determine whether a corporation that files a Form 1120-F (including a protective return) must file Schedule UTP.</li>
<li>The definition of audited financial statement was revised such that an "audited financial statement" is one on which an independent auditor expresses an opinion and that compiled or reviewed financial statements are excluded from the definition of audited financial statement.</li>
</ul><br />
<u><i>Next, the "bad" (or at least not "good") news</i></u>:<br />
<ul><li>Schedule UTP isn't going away, and will apply to an increasing number of taxpayers as time goes on.</li>
<li>There remain unanswered questions (e.g., issues related to the reporting of tax positions in the year in which a corporation is acquired or disposed of; the level or type of due diligence required to obtain reserve information from a related party or information from a pass-through entity relating to a corporation's uncertain tax position involving the pass-through entity; how penalties will be imposed for reporting failures).</li>
<li>The Notice of Proposed Rulemaking ("NPRM") published on September 9 expressly authorizes the IRS to require filing of Schedule UTP, but is not expected to be finalized until some time before the end of the year. This authorization is established pursuant to new Prop. Treas. Reg. section 1.6012-2(a)(4) and (5).</li>
</ul><br />
<i><b>As always, let me know if you have any questions or comments!</b></i><br />
<br />
Links:<br />
<br />
<ul><li><a href="http://www.irs.gov/pub/irs-drop/a-10-75.pdf">IRS Announcement 2010-75</a></li>
<li><a href="http://www.irs.gov/pub/irs-drop/a-10-76.pdf">IRS Announcement 2010-76</a> </li>
<li><a href="http://www.irs.gov/pub/irs-pdf/f1120utp.pdf">Schedule UTP - Uncertain Tax Position Statement</a></li>
<li><a href="http://www.irs.gov/pub/irs-pdf/i1120utp.pdf">Schedule UTP - Instructions</a></li>
<li><a href="http://www.irs.gov/pub/newsroom/internal_directive.pdf">IRS internal directive regarding UTP reporting</a></li>
<li><a href="http://www.irs.gov/pub/irs-irbs/irb10-40.pdf">Notice of Proposed Rulemaking (REG-119046-10)</a> at page 415 of the document.</li>
<li><a href="http://www.aicpa.org/InterestAreas/Tax/Resources/IRSPracticeProcedure/Pages/DisclosureofUncertainTaxPositions.aspx">AICPA article</a> (extensive coverage)</li>
</ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-86003618508593855102010-09-25T19:11:00.000-06:002010-09-26T17:01:10.079-06:00John Boyd - What do skis, a motorboat, a bicycle, and toy tractors have in common?During my latest wanderings on the internet, I came across a writing by the brilliant military strategist <a href="http://en.wikipedia.org/wiki/John_Boyd_%28military_strategist%29">John Boyd</a>. The writing was a presentation entitled <i><b>The Strategic Game of ? And ?</b></i> (June 1987).<br />
<br />
For those who haven't heard that name before, Colonel Boyd developed the <a href="http://en.wikipedia.org/wiki/OODA_Loop">OODA loop</a>, which stands for <b>O</b>bserve, <b>O</b>rient, <b>D</b>ecide, and <b>A</b>ct and was originally applied to combat operations and has since been expanded to analyze systems and processes in general. Definitely an interesting topic (and man).<br />
<br />
So, what does Col. Boyd have to do with the title of this post? Simply this:<br />
<br />
<br />
<blockquote><u>Illustration</u><br />
<ul><li>Imagine that you are on a ski slope with other skiers—retain this image.</li>
<li>Imagine that you are in Florida riding in an outboard motorboat—maybe even towing water-skiers—retain this image.</li>
<li>Imagine that you are riding a bicycle on a nice spring day—retain this image.</li>
<li>Imagine that you are a parent taking your son to a department store and that you notice he is fascinated by the tractors or tanks with rubber caterpillar treads—retain this image.</li>
</ul><br />
Now imagine that you:<br />
<ul><li>Pull skis off ski slope; discard and forget rest of image.</li>
<li>Pull outboard motor out of motorboat; discard and forget rest of image.</li>
<li>Pull handlebars off bicycle; discard and forget rest of image.</li>
<li>Pull rubber treads off toy tractors or tanks; discard and forget rest of image.</li>
</ul><br />
This leaves us with: skis, outboard motor, handlebars, rubber treads. Pulling all this together, what do we have?</blockquote><blockquote><ul><li>A snowmobile. </li>
</ul></blockquote><br />
(source: <a href="http://www.dnipogo.org/boyd/pdf/strategy.pdf">http://www.dnipogo.org/boyd/pdf/strategy.pdf</a>, starting at page 6)<br />
<br />
<br />
<u><b>Note</b></u>: I believe the passage above is permitted to be reproduced under the <a href="http://en.wikipedia.org/wiki/Fair_use">Fair Use doctrine</a>. If the legal copyright owner disagrees, I will certainly consider its removal.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-29077791873485761432010-09-08T12:54:00.000-06:002010-09-08T13:01:07.815-06:00White House releases proposal for 100% expensing of investments in qualified assetsThe White House today also released the following (original pdf at <a href="http://bit.ly/cb3bpu">http://bit.ly/cb3bpu</a>). While it is also just a proposal at this point (and would still need to get through Congress), it would retroactively (to September 8, 2010) allow businesses to write off 100% of their investment in qualified depreciable assets in the year purchased and/or placed in service.<br />
<br />
<blockquote><div style="text-align: center;"><em>President Obama Proposes Accelerating Business Investment to Promote Job Creation</em></div><div style="text-align: center;"><em>Largest Temporary Investment Incentive in History</em></div><div style="text-align: center;"><br />
</div><em>As part of a targeted set of proposals the President will talk about on Wednesday – including an investment in infrastructure to rebuild our roads, railways and runways and an enhanced , permanent Research and Experimentation tax credit – the President will propose to jump-start private investment and job creation by allowing companies to fully deduct qualified capital investments through the end of 2011. This measure would provide tax incentives for businesses to invest in the United States when our economy needs it most, which should both help create jobs now and expand the capital stock to support future growth. This unprecedented step would be the largest temporary investment incentive in American history.</em><br />
<ul><li><em>100 percent expensing through the end of 2011. Businesses in 2008 and 2009 were allowed to depreciate 50 percent of qualified investments up-front, and the current small business bill would extend this through 2010. The Administration proposes to expand this benefit for qualified investments to 100 percent expensing through the end of 2011. In order to begin encouraging additional investment immediately and to avoid capital waiting on the sidelines, the benefit would be retroactive to September 8, 2010.</em></li>
<li><em>Accelerates nearly $200 billion in tax cuts over the next two years—with most paid back over time. Expensing would put nearly $200 billion in the hands of businesses over the next two years—helping companies that make new investments in the United States at a time they need it most. Furthermore, most of this relief would be recouped by the Treasury as businesses regain their strength. Specifically, businesses would get the upfront deduction for their investment—now when they most need it—but would give up their future annual depreciation allowances in future years when the economy is stronger. With this recoupment taken into account, the provision has a net cost of about $30 billion over the next ten years.</em></li>
<li><em>Would provide incentives for millions of businesses to expand investment. Expensing would benefit 1.5 million corporations and several million individuals.</em></li>
</ul></blockquote><blockquote><div style="text-align: center;"><u><em>What Outside Voices Say about Expensing</em></u></div><ul><li><em>Chamber of Commerce: "[These] accelerated cost recovery proposals would, in the short run, act as an insurance policy by encouraging immediate investment, and, in the long run, would increase productivity and further the prospects for long-term economic growth." (Bruce Josten, Executive Vice President)</em></li>
<li><em>Alan Auerbach: UC Berkeley Professor: "Unlike an investment credit, however, bonus depreciation is ideally suited to firms facing credit constraints. By deferring tax payments rather than simply reducing them, it can provide a much bigger benefit to firms facing a high cost of funds than it costs the government." (National Journal Online)</em></li>
<li><em>Chris Edwards: Director of Tax Policy Studies, Cato Institute: "The right tax policy can speed up the economy's return to growth… we need small businesses and entrepreneurs to take up the slack by starting new businesses and investing. Let's make these risky decisions easier for them by cutting their tax burden…(we should) move to expensing which would eliminate many investment distortions. Workers would be the beneficiaries as more capital investment would raise worker productivity and produce higher wages. (2001 Testimony for House Subcommittee on Tax, Finance, and Exports)</em></li>
</ul></blockquote>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-18261570940425441412010-09-08T12:29:00.000-06:002010-09-08T13:03:01.525-06:00White House releases research tax credit proposalThe White House today released the following (original pdf at <a href="http://bit.ly/9Dy8XU">http://bit.ly/9Dy8XU</a>). While it *is* just a proposal at this point (and would still need to get through Congress), it would arguably make it easier for businesses to make use of the research tax credit.<br />
<br />
Also, as I <a href="http://tax-fishing-and-other.blogspot.com/2010/09/president-obama-to-reportedly-will.html">suspected</a>, the proposal expressly seems to eliminate the traditional 1984 - 1988 "base period" that in my experience has caused some serious headaches for businesses that hadn't kept records going back that far. Next step, Congress!<br />
<br />
<blockquote><em>EXPANDED, SIMPLIFIED AND PERMANENT RESEARCH AND EXPERIMENTATION TAX CREDIT</em><br />
<br />
<em>The President proposes to expand, simplify, and permanently extend the Research and Experimentation Tax Credit in order to help companies create good jobs in America now while increasing future productivity and growth. This is a win-win—encouraging job growth and investment now that will pay off with stronger economic growth in the future.</em><br />
<br />
<em>Specifically, the President proposes to:</em><br />
<ul><li><em>Expand the R&E credit by about 20 percent. This would be the largest increase in the credit in its history. In total, the expanded credit would devote about $100 billion over the next 10 years to leverage additional R&D investment. Like the current credit, eligible research and experimentation needs to be performed in the United States, keeping high-skilled jobs in America.</em></li>
<li><em>Simplify the credit. Currently, businesses must choose between using a complex formula for calculating their R&E credit that provides a 20 percent credit rate for investments over a certain base and a much simpler one that provides a 14 percent credit in excess of a base amount. The complex formula is, in fact, so outdated that it takes into account the amount of a business’s R&D expenses from 1984 to 1988. The Administration proposes to increase the rate of the simpler credit to 17 percent, which would make it more attractive and simplify tax filing for businesses. Simplifying the credit in this manner will increase its salience and impact on encouraging investment in research in the United States.</em></li>
<li><em>Permanent credit. The President would make the credit permanent so that businesses could make investments and create jobs today confident that they will continue to benefit from the credit in the future. The President supports fully paying for this permanent tax policy, for example with the over $300 billion in loophole closers and other measures proposed in the FY 2011 Budget.</em></li>
</ul><em>An expanded, simplified, and permanent R&E credit will help keep the U.S. economy at the cutting-edge of 21st century technologies, while expanding high-tech jobs, encouraging innovation, and increasing future productivity and growth:</em><br />
<ul><li><em>Increasing business certainty. The credit has been extended 13 times since its creation in 1981, with some extensions lasting just 6 months, and has also been allowed to lapse since the end of last year. However, although Republicans have supported extension in the past, they have voted against it multiple times this year, and are now blocking legislation that would renew this credit, creating uncertainty with two-thirds of the year already complete. Making this provision permanent would avoid this type of outcome and give businesses the certainty they need to accelerate R&E investments to create jobs today and in the future.</em></li>
<li><em>80 percent of the benefit directly supports jobs in the United States, and every dollar spent encourages U.S.-based investment. Four-fifths of tax credits are attributable to salaries of U.S. workers performing U.S.-based research—meaning that the credit helps create high-skilled jobs, as well as encouraging new innovations and future productivity. The entire credit goes to research and experimentation in the United States, with additional spillover benefits for jobs.</em></li>
<li><em>Increase competitiveness to prevent the United States from falling further behind other countries in tax incentives for R&E. Increasing the R&E tax credit will strengthen innovation at home and make the United States more competitive abroad—helping us to reach our goal of bringing total R&D to 3 percent of GDP. In the 1980s, the United States was the leader in generous tax treatment of R&D; however, today many nations now provide far more generous tax incentives for research than does the United States. By 2008, we had fallen to 17th in generosity for general R&D amongst OECD nations. (</em><a href="http://www.itif.org/files/WM-2009-03-rd.pdf"><em>Information Technology and Innovation Foundation</em></a><em>) Among nations with tax incentives for R&D, the United States now provides one of the weakest incentives, below our neighbors Canada and Mexico, and behind many Asian and European nations. Leverage—each $1 spent on the tax credit creates $2 of benefits for the economy. Studies have shown that every dollar of tax benefit stimulates as much as an additional dollar of private R&D spending in the short run and two dollars in the long run. Every $1 of R & D adds about $2 of benefit to our economy and society as a whole.</em></li>
</ul><div style="text-align: center;"><u><em>What Outside Voices Say about the R&E Credit</em></u></div><ul><li><em>Chamber of Commerce: “The R&D tax credit creates high-wage, American jobs….Extension and expansion of the R&D tax credit will encourage investment in R&D in the United States that will enhance high-wage job growth and contribute to the revitalization of the American economy.” (</em><a href="http://www.uschamber.com/issues/econtax/broad-tax-extenders-coalition-what-provisions-are-included-tax-extenders-package"><em>Chamber website</em></a><em>)</em></li>
<li><em>Rob Atkinson, President of the Information Technology and Innovation Foundation: “If the United States is to remain the world’s preeminent location for technological innovation (and the high paying jobs that result), Congress will need to significantly expand and reform the Research and Experimentation Tax Credit.” (</em><a href="http://www.itif.org/files/AtkinsonRETaxCreditJTT.pdf"><em>Foundation papers</em></a><em>)</em></li>
<li><em>Kevin Hassett, American Enterprise Institute: The R&E credit is “one of the most successful government tax provisions on the books….If the credit were to become permanent, then the benefits could well be higher, since the uncertainty surrounding its renewal would be removed.” (</em><a href="http://www.techlawjournal.com/cong106/rdtax/19990701has.htm"><em>testimony</em></a><em>)</em></li>
<li><em>Douglas Holtz-Eakin (when John McCain’s top economic adviser): “Give companies a permanent R&D credit because we know if the R&D is done here, the manufacturing is more likely to be done here, according to the research literature.” (</em><a href="http://money.usnews.com/money/blogs/capital-commerce/2008/07/28/a-chat-with-mccains-economic-brain-douglas-holtz-eakin.html"><em>US News and World Report</em></a><em>)</em></li>
</ul></blockquote>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-62012643742866024312010-09-06T22:05:00.000-06:002010-09-06T22:10:49.878-06:00President Obama to propose 100% bonus depreciation / section 179 fixed asset write-offs?Well, this has certainly been an active couple of days for tax breaks (reportedly) being proposed by the Obama Administration!<br />
<br />
First it's announced that <a href="http://tax-fishing-and-other.blogspot.com/2010/09/president-obama-to-reportedly-will.html">the President will ask Congress on Wednesday to expand and make permanent the research credit</a>. Now, the Wall Street Journal is reporting <br />
<blockquote><i>President Barack Obama, in one of his most dramatic gestures to business, will propose that companies be allowed to write off 100% of their new investment in plant and equipment through 2011, a plan that White House economists say would cut business taxes by nearly $200 billion over two years.</i><br />
<br />
<i>The proposal, to be laid out Wednesday in a speech in Cleveland, tops a raft of announcements, from a proposed expansion of the research and experimentation tax credit to $50 billion in additional spending on roads, railways and runways. But unlike those two ideas, both familiar from Mr. Obama's 2008 campaign, the investment incentive would embrace a long-held wish by conservative economists that had never won support from either Republican or Democratic administrations.</i> </blockquote>(See <a href="http://bit.ly/b9xcS8">here</a> for the rest of the article. You may need to register at <a href="http://online.wsj.com/">online.WSJ.com</a> to see it.)<br />
<br />
For what it's worth, I haven't found anything about either this item or the research credit proposal on the White House website.<br />
<br />
Stay tuned!Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-61291720691565367242010-09-05T17:36:00.000-06:002010-09-06T10:22:57.032-06:00President Obama to reportedly outline a proposal to make Research Tax Credit permanentAccording to numerous sources, President Obama will ask Congress on Wednesday to both expand, and make permanent, the research tax credit under <a href="http://bit.ly/9rOjUB">section 41</a>. Under current law, the federal research credit expired for qualified expenses (as defined under section 41(b)) paid or incurred after December 31, 2009.<br />
<br />
While details are still scarce, here is what I've seen so far. Please note that until something official comes out, these are just unconfirmed rumors.<br />
<ul><li>Would expand the credit percentage under the Alternative Simplified Method (under section 41(c)(5)) from the generally-applicable pre-2010 amount of 14% to 17%.</li>
<li>The $100 billion proposal will be announced at a speech in Cleveland on September 8, as part of a discussion on the economy.</li>
<li>Of the $100 billion, $85 billion represents the 10-year cost of making the credit permanent. The other $15 billion is the reported cost of expanding it.</li>
<li>I have seen no mention of whether these proposals would apply retroactively (i.e., starting January 1, 2010). My personal expectation is that it would, especially in light of the upcoming midterm elections, but we're likely to find out on Wednesday.</li>
<li>No information is available regarding the standard computation method, but if <a href="http://bit.ly/bXirgV">House Bill 422</a> and <a href="http://bit.ly/a3Hsuo">Senate Bill 1203</a> are any indication (and which seem to have substantial bipartisan support), I suspect that the standard computation method will not be brought back. <i><u>Observation</u>: The standard method is a thorn in many sides due to taxpayers generally being required to base their research credit computations in part on their activities during the 1984 - 1988 time frame. Not surprisingly, many taxpayers don't have information (much less documentation) going back that far.</i></li>
</ul><br />
Sources:<br />
<ul><li> New York Times: <a href="http://nyti.ms/alAYBQ">http://nyti.ms/alAYBQ</a></li>
<li>Washington Post (via Associated Press): <a href="http://bit.ly/c7oEKq">http://bit.ly/c7oEKq</a></li>
</ul>More to come...Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-36493845598420927912010-08-20T13:12:00.000-06:002010-08-20T13:12:58.042-06:00Joint Committee on Taxation releases description of revenue provisions in President's FY2011 budget proposalOn August 16, Joint Committee on Taxation released its "<i>Description Of Revenue Provisions Contained In The President’s Fiscal Year 2011 Budget Proposal</i>" which is available at <a href="http://bit.ly/b6WD70">http://bit.ly/b6WD70</a>.<br />
<br />
The full document runs 521 pages, here's the outline.<br />
<br />
Notes:<br />
<ul><li>Some of the proposed items have already been enacted (e.g., several of the items under "Reform U.S. International Tax System" were part of H.R. 1586 discussed at <a href="http://tax-fishing-and-other.blogspot.com/2010/08/hr-1586-signed-into-law-today.html">http://tax-fishing-and-other.blogspot.com/2010/08/hr-1586-signed-into-law-today.html</a>).</li>
</ul><ul><li>These are the President's revenue (i.e., tax) <i><b>proposals</b></i>, not current law (nor necessarily even pending legislation). Nevertheless, they do provide some insight into the Administration's views and *may* ultimately find their way into future legislation.</li>
</ul><br />
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<div class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.5in; text-indent: -0.5in;">I. INDEX THE INDIVIDUAL ALTERNATIVE MINIMUM TAX AMOUNTS FOR INFLATION<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.5in; text-indent: -0.5in;">II. MAKE PERMANENT AND MODIFY CERTAIN TAX CUTS ENACTED IN 2001 AND 2003<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">A. Dividends and Capital Gains Tax Rate Structure<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">B. Extend Temporary Increase in Expensing for Small Business<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">C. Marginal Individual Income Tax Rate Reductions<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">D. Child Tax Credit<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">E. Increase of Refundable Portion of the Child Credit<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">F. Marriage Penalty Relief and Earned Income Tax Credit Simplification<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">G. Education Incentives<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">H. Modify and Make Permanent the Estate, Gift, and Generation Skipping Transfer Taxes After 2009<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">I. Other Incentives for Families and Children (includes extension of the adoption tax credit, employer-provided child care tax credit, and dependent care tax credit)<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">J. Reinstate the Overall Limitation on Itemized Deductions and the Personal Exemption Phase-out<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.5in; text-indent: -0.5in;">III. TEMPORARY RECOVERY MEASURES<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">A. Extend the Making Work Pay Credit for One Year<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">B. Provide $250 Economic Recovery Payment and Special Tax Credit<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">C. Extend COBRA Health Insurance Premium Assistance<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">D. Provide Additional Tax Credits for Investment in Qualified Property Used in a Qualifying Advanced Energy Manufacturing Project<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">E. Extend Temporary Bonus Depreciation for Certain Property<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">F. Extend Option for Cash Assistance to States in Lieu of Low-Income Housing Tax Credit for 2010<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.5in; text-indent: -0.5in;">IV. TAX CUTS FOR FAMILIES AND INDIVIDUALS<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">A. Increase in the Earned Income Tax Credit<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">B. Expand the Child and Dependent Care Tax Credit<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">C. Automatic Enrollment in Individual Retirement Arrangements<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">D. Saver’s Credit<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">E. Extend American Opportunity Tax Credit<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.5in; text-indent: -0.5in;">V. TAX CUTS FOR BUSINESSES<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">A. Increase Exclusion of Gain on Sale of Qualified Small Business Stock<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">B. Make the Research Credit Permanent<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">C. Remove Cell Phones from Listed Property<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 0.5in; text-indent: -0.5in;">VI. OTHER REVENUE CHANGES AND LOOPHOLE CLOSERS<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">A. Reform Treatment of Financial Institutions and Products<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">1. Impose a financial crisis responsibility fee<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">2. Require accrual of the time-value element on forward sale of corporate stock<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">3. Require ordinary treatment for dealer activities with respect to section 1256 contract<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">4. Modify the definition of control for purposes of the section 249 deduction limitation<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">B. Reinstate Superfund Excise Taxes and Corporate Environmental Income Tax<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">C. Permanent Extension of Federal Unemployment Surtax<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">D. Repeal Last-In, First-Out Inventory Accounting Method<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">E. Repeal Gain Limitation on Dividends Received in Reorganization Exchanges<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">F. Reform U.S. International Tax System<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">1. Defer deduction of interest expense related to deferred income<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">2. Determine the foreign tax credit on a pooling basis<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">3. Prevent splitting of foreign income and foreign taxes<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">4. Tax currently excess returns associated with transfers of intangibles offshore<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">5. Limit shifting of income through intangible property transfers<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">6. Disallow the deduction for excess nontaxed reinsurance premiums paid to affiliates<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">7. Limit earnings stripping by expatriated entities<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">8. Repeal 80/20 company rules<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">9. Prevent the avoidance of dividend withholding taxes<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">10. Modify the tax rules for dual capacity taxpayers<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">G. Combat Under-Reporting of Income on Accounts and Entities in Offshore Jurisdictions<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">1. Require reporting of certain transfers of assets to or from foreign financial accounts<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">2. Require third-party information reporting regarding the transfer of assets to or from foreign financial accounts and the establishment of foreign financial accounts<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">H. Reform Treatment of Insurance Companies and Products<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">1. Modify rules that apply to sales of life insurance contracts<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">2. Modify dividends received deduction for life insurance company separate accounts<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">3. Expand pro rata interest expense disallowance for company-owned life insurance (“COLI”)<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">4. Permit partial annuitization of a nonqualified annuity contract<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">I. Eliminate Fossil Fuel Tax Preferences<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">J. Treat Income of Partners for Performing Services as Ordinary Income<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">K. Modify the Cellulosic Biofuel Producer Credit<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">L. Eliminate Advance Earned Income Tax Credit<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">M. Deny Deduction for Punitive Damages<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">N. Repeal the Lower-of-Cost-or-Market Inventory Accounting Method<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">O. Reduce the Tax Gap and Make Reforms<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">1. Require information reporting on payments to corporations<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">2. Require information reporting for rental property expense payments<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">3. Require information reporting for private separate accounts<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">4. Require a certified taxpayer identification number from contractors and allow certain withholding<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">5. Increased information reporting for certain government payments for property and services<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">6. Increase information return penalties<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">7. Require e-filing by certain large organizations<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">8. Implement standards clarifying when employee leasing companies can be held liable for their clients’ Federal employment taxes<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1.5in; text-indent: -0.5in;">9. 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OTHER INITIATIVES<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">A. Extend and Modify the New Markets Tax Credit<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">B. Reform and Extend Build America Bonds<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">C. Restructure Transportation Infrastructure Assistance to New York City<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">D. Implement Unemployment Insurance Integrity Legislation<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">E. Authorize Post-Levy Due Process<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">F. Increase Levy Authority to 100 Percent for Vendor Payments<o:p></o:p></div><div class="MsoNormal" style="margin: 0in 0in 0.0001pt 1in; text-indent: -0.5in;">G. Allow Offset of Federal Income Tax Refunds to Collect Delinquent State Income Taxes for Out-of-State Residents<o:p></o:p></div>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-26059115951042724472010-08-10T18:41:00.000-06:002010-08-10T21:01:21.771-06:00HR 1586 signed into law today - Say hello to some revenue raisers re international taxesDon't let HR 1586's title(s) ("FAA Air Transportation Modernization and Safety Improvement Act," "Education Jobs and Medicaid Assistance Act," and several others) fool you. It's chock-full of revenue raisers (i.e., tax increases) mostly in the area of international tax.<br />
<br />
Further information (and explanations) will follow, but here are the key revenue offsets and corresponding effective dates:<br />
<ul><li><u>Rules to Prevent Splitting Foreign Tax Credits from the Income to Which They Relate</u> - <i>Effective with respect to foreign income taxes paid or accrued by U.S. taxpayers and section 902 corporations in taxable years beginning after December 31, 2010.</i></li>
<li><u>Denial of Foreign Tax Credit with Respect to Foreign Income Not Subject to U.S. Taxation by Reason of Covered Asset Acquisitions</u> - <i>Effective for covered asset acquisitions after December 31, 2010.</i></li>
<li><u>Separate Application of Foreign Tax Credit Limitation, etc., to Items Resourced Under Treaties</u> - <i>Effective for taxable years beginning after the date of enactment (i.e., August 10, 2010).</i></li>
<li><u>Limitation on the Amount of Foreign Taxes Deemed Paid with Respect to Section 956 Inclusions</u> - <i>Effective for acquisitions of United States property after December 31, 2010.</i></li>
<li><u>Special Rule with Respect to Certain Redemptions by Foreign Subsidiaries</u> - <i>Effective for acquisitions after the date of enactment.(i.e., August 10, 2010).</i></li>
<li><u>Modification of Affiliation Rules for Purposes of Rules Allocating Interest Expense</u> - <i>Effective for taxable years beginning after the date of enactment (i.e., August 10, 2010).</i></li>
<li><u>Termination of Special Rules for Interest and Dividends Received from Persons Meeting the 80-Percent Foreign Business Requirements</u> - <i>Effective for taxable years beginning after December 31, 2010.</i></li>
<li><u>Limitation on Extension of Statute of Limitations for Failure to Notify Secretary of Certain Foreign Transfers</u> - <i>Effective for returns filed after March 18, 2010.</i></li>
<li><u>Elimination of Advance Refundability of Earned Income Tax Credit</u> - <i>Effective for taxable years beginning after December 31, 2010.</i></li>
</ul><br />
Source data: <br />
<ul><li>HR 1586 on Thomas (part of the Library of Congress): <a href="http://bit.ly/ciHQse">http://bit.ly/ciHQse</a></li>
<li>Joint Committee on Taxation's writeup: <a href="http://bit.ly/cEZ5MN">http://bit.ly/cEZ5MN</a></li>
</ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7625968410555364661.post-54951047889107585332010-08-06T18:17:00.000-06:002010-10-06T10:28:50.064-06:00The Passive Foreign Investment Company (“PFIC”) Provisions – A Quick Q&A<style>
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<div class="WordSection1"><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 6pt; text-align: center;"><b><u><span style="font-size: 14pt;"><br />
</span></u></b></div><div align="center" class="MsoNormal" style="line-height: normal; margin-bottom: 6pt; text-align: center;"><i>(or “Just when you thought you were safe because your foreign corporation isn’t a CFC…”)</i></div><div class="MsoNormal" style="line-height: normal; margin-bottom: 6pt;"><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Background</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – There seems (understandably) to be a fair amount of confusion on how to treat PFICs, whether directly owned by US taxpayers or by entities (e.g., partnerships) in which they have an ownership interest. The purpose of this Q&A is to clarify some of the questions and provide guidance for further research if needed. This is <b><u>not</u></b> meant to be an exhaustive discussion of the PFIC rules, but simply a starting point. If you have further questions, please ask someone with experience in this area (e.g., me!).</span></div><div class="MsoListParagraph" style="line-height: normal; margin-bottom: 6pt; text-indent: -0.5in;"><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">1.<span style="font: 7pt 'Times New Roman';"> </span></span></b><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">What is a PFIC and why is that classification relevant?</span></b></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">A PFIC (short for <i>Passive Foreign Investment Company</i>) is a foreign corporation that meets either an <i><u>asset test</u></i> (at least 50% of the foreign corporation’s assets either actually produce, or are held to produce, <i>passive income</i>) or an <i><u>income test</u></i> (at least 75% of the foreign corporation’s gross income is <i>passive income</i>). PFICs are subject to special rules meant to limit a US taxpayer’s benefit from deferring income earned by the PFIC (e.g., </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001291----000-.html"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 1291</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">, which imposes an interest charge on “excess distributions”).</span></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Passive income in this context is any income treated as “foreign personal holding company income” under </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000954----000-.html#c"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 954(c)</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">. This <i>generally</i> (but with exceptions) includes dividends, interest, royalties, rents, annuities, net gains on property that give rise to the aforementioned items, certain net commodity transaction gains, certain net foreign currency gains, income equivalent to interest and dividends, certain net derivative gains, and certain personal service contracts that can be fulfilled by others.</span></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">While there are a number of exceptions to these general rules, they are beyond the scope of this Q&A. For further information, please start with </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sup_01_26_10_A_20_1_30_P_40_VI.html"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">sections 1291 through 1298</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">.</span></div><div class="MsoListParagraph" style="line-height: normal; margin-bottom: 6pt; text-indent: -0.5in;"><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">2.<span style="font: 7pt 'Times New Roman';"> </span></span></b><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">What is a QEF and why is it relevant?</span></b></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">A QEF (short for <i>Qualified Electing Fund</i>) is a PFIC for which the US shareholders (whether direct or indirect) have elected under </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001295----000-.html"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 1295</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> to recognize their proportionate share of the PFIC’s current earnings and profits (as ordinary earnings and net long-term capital gain, as the case may be). Please see below for further information.</span></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">In addition, a QEF election (if made for the year in which the electing US shareholder first held the PFIC’s stock) will generally prevent the application of the otherwise-required anti-deferral rules (e.g., </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001291----000-.html"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 1291</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">).</span></div><div class="MsoListParagraph" style="line-height: normal; margin-bottom: 6pt; text-indent: -0.5in;"><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">3.<span style="font: 7pt 'Times New Roman';"> </span></span></b><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">How is a PFIC’s US shareholder taxed if the PFIC does <u>not</u> have a QEF election in place?</span></b></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">If <u>no</u> QEF election was made, the US shareholder will generally be taxed as follows:</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Income/gains earned by the PFIC</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – No impact.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Deductions/losses incurred by the PFIC</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – No impact.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Distributions by the PFIC</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">:</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Distributions by the PFIC will be treated as dividends to the extent of the US shareholder’s share of the PFIC’s E&P (short for “Earnings & Profits”), with any excess applied first against stock basis (until zero) and then to capital gain.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">In addition, “excess distributions” are subjected to the interest charge rules of </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001291----000-.html"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 1291</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> (as well as a historical lookback/grossup re the taxes that would have been paid, using the highest applicable ordinary income rates for those years). This requires the US shareholder to track taxable distributions for the preceding 3 years and if the current year distributions exceed 125% of that 3-year average, the excess is considered an “excess distribution.”</span></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 1in;"><i><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Note</span></u></i><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">: If the US shareholder held the stock for less than 3 years, they use the average for that shorter preceding period. In addition, there can be no excess distributions in the 1<sup>st</sup> year in which the US shareholder held the PFIC’s stock.</span></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 1in;"><i><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Note</span></u></i><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">: All distributions “in respect of stock” of the PFIC are included for purposes of determining excess distributions, even if those amounts would otherwise have been nontaxable to the US shareholder (e.g., distributions in excess of the PFIC’s E&P which would otherwise have been treated as returns of capital).</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Gain on disposition of the PFIC stock by the US shareholder</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – Treated as an excess distribution in its entirety, which includes taxation at ordinary income rates.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Loss on disposition of the PFIC stock by the US shareholder</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – Treated as a capital loss.</span></div><div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: 6pt; text-indent: -0.5in;"><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">4.<span style="font: 7pt 'Times New Roman';"> </span></span></b><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">How is a PFIC’s US shareholder taxed if the PFIC has a QEF election in place?</span></b></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">If a QEF election <u>was</u> made, the US shareholder will generally be taxed as follows (<i>but see also the comment below regarding situations in which the US shareholder doesn’t make the QEF election with respect to a particular PFIC in the 1st year of stockholding</i>):</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Income/gains earned by the PFIC</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – Included in income and an increase to basis in PFIC stock.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Ordinary income</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – As ordinary income, the US shareholder's pro rata share of the ordinary earnings of the QEF for such year.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Capital gain</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – As long-term capital gain, the US shareholder's pro rata share of the net capital gain of the QEF for such year.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Deductions/losses incurred by the PFIC</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – No impact.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Distributions by the PFIC</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">:</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Distributions of previously recognized/taxed income</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – Excluded from income, but reduces basis in PFIC stock.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Distributions of current-year recognized/taxed income</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – Excluded from income, but reduces basis in PFIC stock.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Distributions in excess of cumulatively recognized/taxed income</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – Reduces basis in PFIC stock as a return of capital; amounts in excess of basis are capital gains.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Gain on disposition of the PFIC stock by the US shareholder</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – Treated as a capital gain (long or short as the facts dictate).</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Loss on disposition of the PFIC stock by the US shareholder</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – Treated as a capital loss.</span></div><div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: 6pt; text-indent: -0.5in;"><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">5.<span style="font: 7pt 'Times New Roman';"> </span></span></b><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">What if the PFIC is also a CFC (a <i>Controlled Foreign Corporation</i>)?</span></b></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">A CFC is defined under </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000957----000-.html#a"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 957(a)</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> and is a foreign corporation controlled (more than 50%) by US shareholders that each own at least 10% of the foreign corporation.</span></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">If a PFIC is also a CFC, </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001297----000-.html#d_1"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 1297(d)(1)</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> generally treats the foreign corporation as not being a PFIC during the “qualified portion” of such shareholder’s holding period with respect to stock in that corporation. The “qualified portion” means the portion of the shareholder’s holding period which is after 12/31/97, and during which the shareholder is a “United States shareholder” (i.e., owns at least 10% of the foreign corporation) and the foreign corporation is a CFC.</span></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><b><i><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Caveat</span></i></b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">: Just because a CFC isn’t generally subject to the PFIC rules doesn’t mean there aren’t issues to deal with. There are, but they are beyond the scope of this Q&A.</span></div><div class="MsoListParagraph" style="line-height: normal; margin-bottom: 6pt; text-indent: -0.5in;"><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">6.<span style="font: 7pt 'Times New Roman';"> </span></span></b><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Who makes the QEF election, and when/how is it made?</span></b></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">The QEF election may only be made by the first US person (including a domestic partnership, S corporation, or estate) that is a direct or indirect shareholder of the PFIC. For example, if a US individual (“USI”) is a partner in a US partnership (“USP”), which is a partner in a foreign partnership (“FP”), which is a shareholder in a PFIC, the QEF election could only be made by the US partnership (“USP”).</span></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">A US shareholder generally must make a QEF election by the due date (including extensions) for filing the US shareholder’s federal income tax return for the first year to which the election is desired to apply. The election will then apply to that (and all subsequent) years of that foreign corporation. The election is made by completing the applicable parts of </span><a href="http://www.irs.gov/pub/irs-pdf/f8621.pdf"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Form 8621</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> (instructions </span><a href="http://www.irs.gov/pub/irs-pdf/i8621.pdf"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">here</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">) and attaching it to the US shareholder’s timely-filed federal income tax return.</span></div><div class="MsoListParagraph" style="line-height: normal; margin-bottom: 6pt; text-indent: -0.5in;"><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">7.<span style="font: 7pt 'Times New Roman';"> </span></span></b><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Is the QEF election required to be made in the first year the US shareholder owns the PFIC stock?</span></b></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">No. However, if the US shareholder does not make the election in the 1<sup>st</sup> year of holding the stock, it will be subject to both the </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001291----000-.html"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 1291</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> rules and the QEF rules.</span></div><div class="MsoListParagraph" style="line-height: normal; margin-bottom: 6pt; text-indent: -0.5in;"><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">8.<span style="font: 7pt 'Times New Roman';"> </span></span></b><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">If the US shareholder doesn’t make the QEF election with respect to a particular PFIC in the 1<sup>st</sup> year of stockholding, how can they avoid the </span></b><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001291----000-.html"><b><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 1291</span></b></a><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> rules?</span></b></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">There are several ways to do so, including (but not limited to) the following:</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Deemed sale election</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – The US shareholder may <i>prospectively</i> treat the PFIC as if it had been a QEF from the 1<sup>st</sup> year in which they held stock (i.e., a “pedigreed PFIC”) by electing under </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001291----000-.html#d_2_A"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 1291(d)(2)(A)</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> to recognize gain on the sale of that PFIC’s stock on the first day of the year for its fair market value (with the gain, if any, treated as an <i>excess distribution</i> for </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001291----000-.html"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 1291</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> purposes). <b><i>Caveat</i></b>: The US shareholder must meet 3 tests to qualify for this election:</span></div><div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">The PFIC becomes a QEF with respect to the US shareholder for a taxable year which begins after December 31, 1986,</span></div><div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">The US shareholder holds stock in that PFIC on the first day of such taxable year, and</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">The US shareholder establishes to the IRS’s satisfaction the fair market value of such stock on such first day.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Deemed dividend election</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – The US shareholder may <i>prospectively</i> treat the PFIC as if it had been a QEF from the 1<sup>st</sup> year in which they held stock (i.e., a “pedigreed PFIC”) by electing under </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001291----000-.html#d_2_B"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">section 1291(d)(2)(B)</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> to include in gross income as a dividend an amount equal to the portion of the post-1986 earnings and profits of such company attributable to the stock in the PFIC. This amount will be treated as an <i>excess distribution</i>. <b><i>Note/Caveat</i></b>: The US shareholder must meet 3 tests to qualify for this election, but this election is generally relevant to less-than-10% US shareholders due to the elimination of the CFC/PFIC overlap (as noted above) in 1997.</span></div><div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">The PFIC becomes a QEF with respect to the US shareholder for a taxable year which begins after December 31, 1986,</span></div><div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">The US shareholder holds stock in that PFIC on the first day of such taxable year, and</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">The PFIC is a CFC.</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1in; text-indent: -0.25in;"><span style="color: black; font-family: Symbol; font-size: 9.5pt;">·<span style="font: 7pt 'Times New Roman';"> </span></span><u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Retroactive election</span></u><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> – The US shareholder may <i>retroactively</i> treat the PFIC as if it had been a QEF from the 1<sup>st</sup> year in which they held stock (i.e., a “pedigreed PFIC”) by electing under </span><a href="http://edocket.access.gpo.gov/cfr_2009/aprqtr/26cfr1.1295-3.htm"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Treas. Reg. section 1.1295-3(b)</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> if they:</span></div><div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Reasonably believed that as of the election due date the foreign corporation was not a PFIC for its taxable year that ended during the retroactive election year;</span></div><div class="MsoListParagraphCxSpMiddle" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Filed a Protective Statement with respect to the PFIC, applicable to the retroactive election year, in which the shareholder described the basis for their reasonable belief and extended the periods of limitations on the assessment of PFIC-related taxes for all taxable years of the shareholder to which the Protective Statement applies; and</span></div><div class="MsoListParagraph" style="line-height: normal; margin: 0in 0in 6pt 1.5in; text-indent: -0.25in;"><span style="color: black; font-family: 'Courier New'; font-size: 9.5pt;">o<span style="font: 7pt 'Times New Roman';"> </span></span><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Complied with any other terms and conditions of the Protective Statement.</span></div><div class="MsoListParagraphCxSpLast" style="line-height: normal; margin-bottom: 6pt; text-indent: -0.5in;"><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">9.<span style="font: 7pt 'Times New Roman';"> </span></span></b><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Do dividends from a PFIC qualify for the federal 15% capital gains tax rate (whether or not a QEF election has been made)?</span></b></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">No. </span><a href="http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000001----000-.html#h_11_C_iii"><span style="font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Section 1(h)(11)(C)(iii)</span></a><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;"> specifically excludes dividends from a PFIC from the special beneficial rate.</span></div><div class="MsoListParagraph" style="line-height: normal; margin-bottom: 6pt; text-indent: -0.5in;"><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">10.<span style="font: 7pt 'Times New Roman';"> </span></span></b><b><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">Does California conform to these rules?</span></b></div><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt 0.5in;"><span style="color: black; font-family: 'Verdana','sans-serif'; font-size: 9.5pt;">No. As a result, you will often see differences in both income recognized (as well as differences in stock basis) between federal and California. California taxes distributions from a PFIC when made to the US shareholder.</span></div><div class="MsoNormal" style="line-height: normal; margin-bottom: 6pt;"><br />
</div></div>Unknownnoreply@blogger.com10tag:blogger.com,1999:blog-7625968410555364661.post-85129180209511158562010-06-18T17:03:00.000-06:002010-06-18T17:03:13.028-06:00Therapeutic Discovery Project Tax Credit / Grant - IRS Releases Form 8942, Instructions, and Additional GuidanceMore information to follow as soon as I've had a chance to review, but in the interim:<br />
<ul><li>Form 8942: <a href="http://bit.ly/cNFF2Y">http://bit.ly/cNFF2Y</a></li>
<li>Form 8942 instructions: <a href="http://bit.ly/9hdjI9">http://bit.ly/9hdjI9</a></li>
<li>IRS Q&A: <a href="http://bit.ly/depaMx">http://bit.ly/depaMx</a></li>
</ul>Let me know if you have any questions, I'd love to help!<br />
<br />
<div> </div>Unknownnoreply@blogger.com0