Tuesday, August 14, 2012
Friday, August 10, 2012
Friday, August 3, 2012
Wednesday, August 1, 2012
2012 Second Quarter Federal Tax Developments
During
the second quarter of 2012, there were many important federal tax developments.
This letter highlights some of the more important developments for you. As
always, please give our office a call or email if you have any questions.
Health
care legislation
In
a 5-4 decision, the U.S. Supreme Court upheld the Patient Protection and
Affordable Care Act (PPACA) and its companion law, the Health Care and
Education Reconciliation Act (HCERA) on June 28, 2012 (National Federation of
Independent Business et al. v. Sebelius). Chief Justice John Roberts, writing
for the majority, held that the law’s individual mandate is a valid exercise of
Congress’ taxing power. Four justices dissented and would have overturned the
law.
Since
2010, the IRS has issued extensive guidance on the tax provisions in the health
care legislation. Many of the tax provisions were effective in 2010, 2011 and
2012; but others are scheduled to take effect after 2012 and in subsequent
years. These include an additional 0.9 percent Medicare tax for higher income
individuals (tax years beginning after December 31, 2012), a Medicare tax of
3.8 percent on investment income for higher income individuals, trusts and
estates (tax years beginning after December 31, 2012), and a higher threshold
to claim an itemized deduction for unreimbursed medical expenses (tax years
beginning after December 31, 2012 with a temporary waiver for individuals age
65 and older). Our office will keep you posted of developments.
Foreign
accounts
The
IRS announced in June streamlined procedures for U.S. citizens who are
nonresidents, including dual citizens, who have failed to file U.S. income tax
and information returns, such as Form TD F 90-22.1, Report of Foreign Bank and
Financial Accounts (FBAR). The IRS also reported it has collected more than $5
billion from its 2009 and 2011 offshore voluntary disclosure initiatives
(OVDI). The IRS reopened the 2011 OVDI in January 2012 but with less generous
terms.
Corporations
In
June, the IRS issued new temporary and proposed regulations on corporate
inversions. The regulations remove the facts and circumstances test from
regulations issued in 2009 and replace it with a bright-line rule describing
the threshold of activities required for an expanded affiliated group (EAG) to
have substantial business activities in the relevant foreign country. The
regulations apply to transactions completed on or after June 7, 2012, the IRS
explained.
Partnerships
The
IRS unveiled in June a safe harbor under which it will not challenge a
determination by a publicly traded partnership that income from discharge of
indebtedness (cancellation of debt "COD" income) is qualifying income
(passive-type income) under Code Sec. 7704(d). To benefit from the safe harbor,
the COD income must result from debt incurred in activities that produce
qualifying income.
Mortgage
interest deduction
In
May, the U.S. Tax Court found that a taxpayer who filed as married filing separately
was limited to a deduction for interest paid on $500,000 of home acquisition
indebtedness plus interest paid on $50,000 of home equity indebtedness
(Bronstein, 138 TC No. 21). The court found that the plain language of the
statute mandated this result, which is half the $1 million/$100,000 limit
imposed on other taxpayers.
Deferred
compensation
The
IRS issued proposed regulations intended to tighten the definition of
substantial risk of forfeiture (SRF) that applies to compensatory transfers of
property in connection with the performance of services under Code Sec. 83 in
June. As a result, fewer restrictions would qualify as an SRF.
Statute
of limitations
On
April 25, 2012, the U.S. Supreme Court resolved a split among the circuit
courts of appeal by concluding that an overstatement of basis does not result
in an omission of income for statute of limitations (SOL) purposes (Home
Concrete & Supply, LLC). As a result the IRS has three years, rather than
six years, to act against taxpayers who overstate basis except where fraud can
be proved. The issue has arisen in a number of tax shelter cases where a
taxpayer overstates basis in a partnership interest, resulting in an
understatement of income.
Income
In
April, a taxpayer successfully persuaded the Tax Court that her documentary
film work was for-profit and not a hobby (Storey, TC Memo. 2012-115). The IRS
had determined that the taxpayer, who had a full-time job as an attorney, had
engaged in filmmaking without the intent to make a profit. The Tax Court found
that the taxpayer had become skilled in filmmaking by attending classes, spent
many hours outside of her full-time job on filmmaking and concluded that the
taxpayer had a for-profit motive.
Estate
tax
The
IRS issued temporary and proposed regulations in June on temporary portability
election for qualified estates. The portability election generally allows the
estate of a deceased spouse dying after December 31, 2010 and before January 1,
2013 to transfer the decedent’s unused estate tax exclusion amount, if any, to
the surviving spouse.
Local
lodging expenses
In
May, the IRS issued proposed reliance regulations outlining when an employee
may treat local lodging expenses as working condition fringe benefits or
accountable plan reimbursements; and when employers may treat qualified
expenditures as deductible business expenses. The proposed regulations also
provide a safe harbor for an employee to deduct local lodging expenses if
certain requirements are satisfied.
Deposit
interest
The
IRS issued final regulations in April requiring U.S. banks and other financial
institutions to report interest on deposits paid to a nonresident alien (NRA).
The requirement applies to residents of any country having a tax information
exchange agreement (TIEA) with the U.S. The reporting requirement applies to
interest payments made on or after January 1, 2013, the IRS explained.
Health
savings accounts
The
IRS announced in May inflation-adjusted amounts for health savings accounts
(HSAs) in 2013. For 2013, the annual contribution limit for an individual with
self-only coverage under a high deductible health plan (HDHP) is $3,250
compared to $3,100 for 2012. For 2013, the annual contribution limit for an
individual with family coverage under a HDHP is $6,450, compared to $6,240 for
2012. A HDHP is defined as a health plan with an annual deductible that is not
less than $1,250 for self-only coverage and $2,500 for family coverage for
2013.
Fresh
start initiative
The
IRS announced in May an expansion of its Fresh Start initiative, designed to
help taxpayers struggling financially. The IRS provided more flexible terms to
its offer in compromise (OIC) program. The IRS also instructed its examiners on
taxpayers’ ability to pay when student loans or state/local taxes are
outstanding.
Economic
substance
The Health Care and Education Reconciliation Act (HCERA) codified the economic substance doctrine. In April, IRS Chief Counsel released instructions to its personnel on when they may raise the codified economic substance doctrine.
Telephone
tax refunds
In
April, the IRS reminded taxpayers of the July 27, 2012 deadline to request
refunds of federal excise taxes paid on long-distance telephone communications
billed after February 23, 2003 and before August 1, 2006. In 2006, the IRS had
announced that would stop collecting the three percent excise tax on
long-distance telephone communications. Individuals who filed a 2006 return but
who did not request a telephone excise tax refund should file an amended return
or Form 1040-EZT (if not required to file a 2006 return).
Bankruptcy
The
Supreme Court held in May that tax on a bankrupt debtor’s post-petition farm
sale was not dischargeable in bankruptcy (Hall). The Supreme Court found that
federal income tax liability resulting from a debtor farmer’s post-petition
farm sale was not "incurred by the estate" under Bankruptcy Code Sec.
503(b).
IRS
administration
In
April, IRS Commissioner Douglas Shulman announced that he will step down at the
end of his five-year term in September 2012. Shulman has overseen such
high-profile programs as the offshore voluntary disclosure initiative (OVDI),
the return preparer oversight initiative and modernization of the agency’s
operating systems.
If
you have any questions about these or any federal tax developments, please
contact our office.
Tuesday, July 31, 2012
Planning 2012: Travel and Entertainment Review
Although
the computer age and modern telecommunications have reduced the need for
in-person contact, it is still sometimes necessary for businesses to send
employees out of town on business, or to entertain clients and customers. How
travel and entertainment expenses are handled can have an impact on your net
income, your paperwork burden, and on the tax results for you and your
employees.
If
you require employees to substantiate travel or entertainment expenses that are
bona-fide business deductions, partial or complete advances or reimbursements
are not treated as compensation income to the employee, and the advance or
reimbursement is not subject to social security taxes or to income tax withholding.
However, only 50 percent of any business-related meal or entertainment expense
is deductible by the company, including costs of meals consumed by employees
while they are traveling.
To
ensure that the reimbursement is not subject to payroll and withholding taxes,
the business must maintain a fairly detailed recordkeeping system. For travel,
employees must submit a written statement of the time, place, destination and
business purpose of the trip and the amount of expenses incurred by category (e.g.,
travel, meals, lodging). For meals or entertainment, the employee must submit a
written statement showing time, place and cost of the event, who was
entertained, and the business purpose of the meal or entertainment (if the
event follows or precedes a business discussion, additional recordkeeping is
required). Finally, the employee must keep and turn in to the employer
documentary evidence such as receipts for all lodging expenses, and for other
travel and entertainment expenses over $75.
Because
the recordkeeping can be onerous, the law provides some shortcuts, depending on
the type and frequency of the travel and entertainment expenses. For example,
the paperwork burden and the cost of travel expenses can be decreased by giving
employees who travel for business purposes a flat daily allowance, a per diem,
which varies by destination, to cover meals, lodging and incidental expenses.
If the daily allowances do not exceed IRS-determined maximums, they are payroll
and income tax free with a minimum of paperwork; all that is required is a
record of the time, place and business purpose of the travel. To-the-penny
accounting of expenses and corroborating receipts is not necessary.
One
simple way to cut out paperwork while boosting company tax deductions is to give
employees a flat allowance for anticipated travel and entertainment, and not
require these expenses to be substantiated. The allowance is fully deductible
as compensation (assuming the employees' compensation packages are reasonable),
and there is minimal paperwork required. The allowance, however, is subject to
payroll and income tax withholding, and the company may not be able to
determine what their actual travel and entertainment expenses are for budgeting
purposes. In addition, there are unfavorable tax consequences for the employee,
even if the travel and entertainment expenses are deducted on their own
returns.
Travel
and entertainment expenses are particularly susceptible to challenge by the
IRS. However, in some instances, businesses may fail to deduct qualifying
travel and entertainment expenses, or may be deducting these expenses
improperly. We can perform a confidential review of your company's travel and
entertainment expenses to ensure compliance with the complex rules that govern
these deductions. Please call us to arrange an appointment at your earliest
convenience.
Monday, July 30, 2012
Planning 2012: Tax Strategies for Dependent Children
Raising
a family can be both challenging and rewarding. As a parent, you worry about
your children receiving quality child care, paying medical expenses, or saving
for college. You want to do what is right for your family, but there are so
many factors to consider, including how your choices will impact your family’s
overall tax burden. We can assist you in understanding your options and in
taking full advantage of the credits and deductions that you are entitled to as
a parent.
For
instance, you may be able to take a child and dependent care credit if your
child is under the age of 13 at the end of the year. However, not all expenses
qualify, and some expenses may qualify for both the dependent care credit and
the deduction for medical expense, depending on your circumstances. In
addition, if your employer offers a flexible spending plan, you might consider
whether or not participating in the plan saves you more money than claiming the
credit. If you are divorced, the issues can be more complicated. Who is
entitled to an exemption for your child and how does claiming the exemption
impact other tax benefits for a dependent?
Even
if child care is not a concern of yours, these examples illustrate how complex
family tax planning can be. There are many other tax considerations, such as
the benefits and pitfalls of shifting income to minor children in light of the
kiddie tax; determining what expenses qualify for the education credits and
deductions and who can claim them; the eligibility requirements for the earned
income credit; or the impact of the alternative minimum tax. We can help you
see the bigger picture and develop a plan that both meets your needs and saves
you money. Please call our office at your earliest convenience to make an
appointment for a full review of your tax situation.
Sunday, July 29, 2012
2012 Planning: Tax Solutions for S Corporations
An
S corporation, such as yours, is a pass-through entity that is treated very
much like a partnership for federal income tax purposes. As a result, all
income is passed through to your shareholders and taxed at their individual tax
rates. However, unlike a C corporation, an S corporation’s income is taxable to
the shareholders when it is earned whether or not the corporation distributes
the income. Because an S corporation has a unique tax structure that directly
impacts shareholders, it is important for you to understand the S corporation
distribution and loss limitations, as well as how and when items of income and
expense are taxed, before developing your overall tax plan.
Other key points to consider when developing your comprehensive tax strategy include:
In
addition, some S corporation income and expense items are subject to special
rules and separate identification for tax purposes. Examples of separately
stated items that could affect a shareholder’s tax liability include charitable
contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and
net income or loss related to rental real estate activities.
These
items, as well as income and losses, are passed through to the shareholder on a
pro rata basis, which means that the amount passed through to each shareholder
is dependent upon that shareholder’s stock ownership percentage. However, a
shareholder’s portion of the losses and deductions may only be used to offset
income from other sources to the extent that the total does not exceed the
basis of the shareholder’s stock and the basis of any debt owed to the
shareholder by the corporation. The S corporation losses and deductions are
also subject to the passive-activity rules.
Other key points to consider when developing your comprehensive tax strategy include:
-
the availability of the Code Sec. 179 deduction at the corporate and shareholder level;
- reporting requirements for the domestic production activities deduction;
- the tax treatment of fringe benefits;
- below-market loans between shareholders and S corporations; and
- IRS scrutiny of distributions to shareholders who have not received compensation.
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